While the overall market hovers near an all-time high, retail stocks lagged. Take the SPDR S&P Retail ETF (NYSEARCA:XRT), for instance, the largest ETF in the space, which has yet to reclaim its 2021 highs. In fact, several major retail stocks have seen further dips recently.
This divergence from the overall market likely presents a unique opportunity for investors looking for exposure to quality retail stocks. While Wall Street continues to overlook most retail names, many provide exceptional value and offer a wide margin of safety compared to the inflated valuations in today’s market.
For this article, I have selected three retail stocks that have experienced recent dips, even though their investment cases hold strong. These stocks offer an attractive entry point on a standalone basis and promise solid returns as the retail industry gradually rebounds.
By gaining exposure to these undervalued names, investors can enjoy strong upside potential and mitigate the risks associated with higher valuations elsewhere.
CVS Health Corporation (CVS)
The first retail stock to consider today is CVS Health Corporation (NYSE:CVS). The diversified healthcare giant operates retail pharmacies, a pharmacy benefits manager, and health insurance services through Aetna. Despite its attractive, recession-proof business model, CVS stock has faced a challenging year. Shares are down 23.2% over the past year, significantly underperforming the overall market.
However, there’s more to the story. CVS continues to grow its revenues consistently, which hit a new record of $659.7 billion over the past four months. The bears will argue that CVS’ recent dip in earnings per share, driven primarily by rising interest costs and reduced margins on prescription drugs, sunk consensus full-year EPS estimates close to $7, or essentially to 2018 levels. This suggests that CVS’ profitability has lagged notably lately.
That said, EPS is poised to rebound following the likelihood of rate cuts in the short- to medium-term. In the meantime, even when applying the current depressed estimates, the stock’s valuation remains highly compelling. With an implied price-to-earnings (P/E) ratio of just 8.3x at current levels, it’s hard to keep overlooking CVS stock.
AutoZone (AZO)
The second retail stock to consider is AutoZone (NYSE:AZO), a company often praised for its consistent market outperformance over the decades.
AutoZone’s enormous success stems from management’s stellar execution of a simple business model. The strategy is straightforward: expand by opening stores in underserved markets, increase/maximize same-store sales, and return all excess funds to shareholders through share repurchases. This simple, repetitive model resulted in massive compounding returns over time.
This strategy has led AutoZone to grow its yearly sales since going public 33 years ago. Additionally, since starting its stock buyback program in 1998, AutoZone diminished its share count by 89%. Thus, with shares currently trading below their March highs and the forward P/E standing at an attractive 18.3x – despite Wall Street forecasting a compound annual growth rate of nearly 15% over the next five years – I believe that AutoZone stock presents one of the most compelling opportunities amongst its retail peers.
Ulta Beauty (ULTA)
The third retail stock that seems to present a compelling opportunity at its current levels is Ulta Beauty (NASDAQ:ULTA), a premier beauty retailer offering cosmetics, fragrance, skincare, and salon services across the U.S. Ulta established itself as a go-to destination for beauty enthusiasts, providing a unique blend of high-end and drugstore brands under one roof.
The stock has been hit hard lately, plunging from its 52-week high of about $575 and down about 32% since due to fears of a slowdown in revenue growth. Indeed, sales are expected to land close to $11.56 billion this year, up just 3.1% compared to 2023. Nevertheless, Ulta continues to be highly profitable, capitalizing on its brand and dedicated customer base. Furthermore, consensus revenue estimates anticipate a rebound in growth starting from 2025, driven by an improving consumer environment.
In the meantime, management continues to buy back shares aggressively at current levels, which should prove highly accretive EPS in the coming years. The stock now trades at a price-to-earnings ratio of 14x. The anticipated rebound in revenue growth, coupled with the advantages of a reduced share count, is likely to reignite bullish sentiment and drive substantial upside potential in ULTA stock.
On the date of publication, Nikolaos Sismanis held a long position in ULTA. The opinions expressed in this article are those of the writer, subject to the nvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.