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Bet on These 4 Retail Stocks for Value & Earnings Growth

It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” — Warren Buffett.

The strategy is quite simple: find stocks that are trading below their inherent worth. An investment decision based on the intrinsic value of stocks seems feasible in an economy, which recently witnessed a hike in the benchmark interest rate, experienced a massive overhaul in the U.S. tax code, registered robust corporate earnings and saw major indexes scaling new highs.

In today’s discussion, we are focusing on the Retail-Wholesale sector, which currently occupies the top 25% (4 out of 16) position in the list. But before zeroing on a strategy and looking for lucrative counters to place your bets, let’s take a sneak peek into what’s going on in the sector.

Changing Retail Dynamics

Retail is no more restricted to brick & mortar. The scenario has drastically changed with the advancement of technology and digital transformation that are playing key roles in changing consumer shopping pattern. Consumers now prefer to shop online from the comfort of their homes rather than hopping from one store to another. Retailers who have responded quickly to it by staying ahead technologically stand in good stead.

Retailers are now efficiently allocating a large chunk of capital toward multi-channel growth strategy focused on improving merchandise offerings, and developing IT infrastructure to enhance the web and mobile experience of customers. Further, the retailers are renovating stores, developing fulfillment centers to enable speedy delivery, implementing an enterprise-wide inventory management system along with improving relationship with customers.

Retail stocks once bogged down by tough environment are now suddenly climbing the charts. The sector has advanced over 30% in a year and has comfortably outperformed the S&P 500’s gain of 20.2%.

The rebound in oil prices from all-time lows, fall in the unemployment rate to 17-year low, and improving housing and manufacturing sectors signal that the economy is on a recovery mode. These factors are favorable for retailers. Steady job additions and gradual wage acceleration boost consumer confidence. Although consumer confidence dipped to 122.1 in December from November’s revised reading of 128.6, analysts believe that consumers remain optimistic about the economy.

Consequently, adding a few stocks from the space would be a prudent decision at the current juncture. We suggest investing in top-ranked stocks with a good Value Score and solid earnings growth potential.

Here’s the Ideal Strategy

Investment in stocks based on a diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. Thus, for long-term investors, a look at the intrinsic value of a stock is always warranted. So what are the criteria to identify value stocks?

A value stock may have a high dividend yield, low price-to-book ratio, low price-to-earnings ratio or a low price-to-sales ratio. However, it might be difficult for one to look at each parameter and compare with the peer group for an analysis on whether the stock is attractive from the value perspective. To make the task easier, Zacks has designed the new Style Score System.

The attractiveness of a stock as an investment option is confirmed by its Value Style Score of A or B. Our research shows that stocks with Style Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. Further, we have selected value stocks that have estimated earnings per share growth rate of 10% or more for the current fiscal year.

4 Prominent Value Picks

RH RH, a home furnishing retailer, is a lucrative option. The stock has a long-term earnings growth rate of 34.4% and a Value Score of B. We note that in a year, the stock has soared nearly 200%, while the industry has advanced 11.1%. The stock has estimated earnings per share growth rate of 132.1% for fiscal 2017. It has delivered an average positive earnings surprise of 17% in the trailing four quarters. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors can count on Beacon Roofing Supply, Inc. BECN with a Value Score of B and a long-term earnings growth rate of 25%. In a year, this Zacks Rank #1 stock has advanced roughly 45.2%, compared with the industry’s growth of 35.3%. This distributor of residential and non-residential roofing materials, and other complementary building materials delivered an average positive earnings surprise of 6.4% in the preceding four quarters. The stock has estimated earnings per share growth rate of 42.5% for fiscal 2018.

Rush Enterprises, Inc. RUSHA has also emerged as a strong contender with a long-term earnings growth rate of 15% and a Value Score of A. In a year, the stock has surged roughly 59.7%, comfortably outperforming the industry’s growth of 6.6%. This integrated retailer of commercial vehicles and related services delivered an average positive earnings surprise of 32.6% in the trailing four quarters. It sports a Zacks Rank #1. The stock has estimated earnings per share growth rate of 92.3% for fiscal 2017.

Another solid bet is Sprouts Farmers Market, Inc. SFM, which has a long-term earnings growth rate of 11.3% and a Value Score of B. This provider of fresh, natural, and organic food delivered an average positive earnings surprise of 16.3% in the trailing four quarters and carries a Zacks Rank #2. In a year, the stock has advanced approximately 25.7%, while the industry grew 7.2%. The stock has estimated earnings per share growth rate of 19.3% for fiscal 2017.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Rush Enterprises, Inc. (RUSHA): Free Stock Analysis Report
Beacon Roofing Supply, Inc. (BECN): Free Stock Analysis Report
Sprouts Farmers Market, Inc. (SFM): Free Stock Analysis Report
Restoration Hardware Holdings Inc. (RH): Free Stock Analysis Report
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