Retail stocks have been surging this year, with a gain of more than 41% so far for the SPDR S&P Retail ETF, because investors are optimistic that an economic reopening and pent-up demand will lead to more spending on apparel and accessories.
That rally could last almost another half year—or more for some strong players, says UBS.
Analyst Jay Sole took a look at the specialty and apparel retail landscape on Wednesday. He says the reopening trade could lift stock prices in this category by between 7% and 13% by September.
Forecasts for earnings per share will be increased in the coming months, helping the stocks to rise, Sole says. His own EPS estimates for the calendar year are an average of about 18% ahead of the consensus calls for stocks in the group.
That said, the good times can’t last forever. Beyond September, he says, the rally will fizzle, and stock prices will diverge. That will make it more important for investors to choose companies with “strong and underappreciated post-pandemic growth prospects over those without them,” he says.
His top Buy ideas are Nike(ticker: NKE), Deckers Outdoors (DECK), Canada Goose (GOOS), Ralph Lauren (RL), Skechers (SKX), Levi Strauss & Co. (LEVI), PVH (PVH), American Eagle (AEO), and Capri Holdings(CPRI). Not only do these stocks appear to have a robust growth prospects, but they also offer “the best combination of upside to consensus EPS estimates and price-to-earnings expansion potential,” Sole writes.
They look best positioned to thrive once investors look past the way the pandemic disrupted retailing and the current reopening trade toward a longer-term rebound, he says.
Sole also upgraded Abercrombie & Fitch (ANF),Gildan Activewear(GIL) Kontoor Brands(KTB), and L Brands(LB) to Buy from Hold. Those stocks’ prices don’t yet reflect their long-term growth potential, nor transformations at the individual companies that have been overshadowed by the pandemic, he says.
“We now realize these four companies have made bigger adaptations than previously thought.”