Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.
What are we looking for?
Well-valued stocks in the U.S. retail sector.
With approximately seven weeks until Christmas, U.S. retailers are entering their busiest and most profitable part of the year. Though the September U.S. Retail Sales Report was lacklustre, many analysts expect that low gasoline prices will provide a cushion to consumers' wallets – potentially helping the broader retail sector.
The screen
We will be using Recognia Strategy Builder to search for U.S. retail stocks that may benefit from the upcoming holiday season. We begin by setting a minimum market capitalization threshold of $5-billion (U.S.) to focus on larger, more established retailers in the American market. Next, we will look for companies with reasonable valuations based on their earnings yield and their price-to-sales ratio.
We will consider companies with earnings yields of 5 per cent or more. Earnings yield is defined as a company's earnings per share divided by its price per share, with higher yields being more attractive. As a further screen on valuation, we will select only companies with price-to-sales ratios of 2 or less. Price-to-sales is a measure of relative valuation defined as a company's share price divided by the revenue-per-share over the preceding 12 months. This ratio is often used to compare companies in similar industries for relative value.
More about Recognia
Recognia is a global leader in quantitative and technical analysis. It is accessible by more than 20 million investors and traders worldwide through leading retail online brokers. Recognia covers 85 exchanges worldwide, and analyzes 72,000 instruments daily including stocks, indexes, exchange-traded funds, currencies and futures.
What did we find?
American department store chain Kohl's Corp. ranks No.1 on our screen with an $11.2-billion market cap and a 0.58 price-to-sales ratio. Kohl's also has the second-highest earnings yield on our screen at 8 per cent. On Oct. 29, the stock sold off more than 6 per cent based on softening same-store sales. This selloff has resulted in the attractive valuation metrics seen in our screen.
Target Corp. ranks No.5 on our list with a market cap of $39.2-billion. Target has had its share of struggles over the past year with a large data breach and operational challenges in its Canadian unit. In the past five months Target's shares have been bid up 11 per cent, indicating a bullish outlook among investors.
Columbus, Ohio-based L Brands Inc. also makes our screen at position No.14. L Brands is best known for its Victoria's Secret and Pink retail chains. In September, the company reported robust financial results with same-store-sales growing 6 per cent and total sales up 9 per cent year-over-year.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.