Retail stocks have taken a beating this year. As investors move into the second half, there are many concerning signs. Inflation reached 9.1% in June. That was the highest level in 40 years and especially concerning given Fed efforts to tamp down surging inflation with interest-rate hikes. Although the July inflation numbers were down slightly at 8.5%, there is plenty of fear still swirling.
Indeed, consumer confidence levels fell 2.7 points in July as well. That sends mostly negative signals to the retail sector.
So, it should be no surprise that the retail sector has performed poorly recently. One fairly representative ETF, The SPDR S&P Retail ETF (NYSEARCA:XRT), is down 23.8% in 2022. The S&P 500, on the other hand, is down a relatively modest 11.9% this year.
That also means that there’s a lot of blood in the streets. There are plenty of companies in the retail sector poised to rebound very strongly. Here are a few that look particularly likely to fare well moving forward.
Undervalued Retail Stocks: O’Reilly Automotive (ORLY)
O’Reilly Automotive (NASDAQ:ORLY) is a company and stock in the aftermarket industry. All indications are that that is a good place to be at the moment.
The company released Q2 earnings at the end of July. Those earnings were quite strong. They point to a company that grew its sales 4.3% in the quarter on a year-over-year (YOY) basis. And investors will be impressed to know that the company’s diluted earnings per share (EPS) has registered a 25% compound annual growth rate (CAGR) over the past three years.
Those signs are positive in the immediate term, but what about the longer term? Well, there’s positive news there as well. The U.S. vehicle fleet is getting older. That means more owners are driving their cars for longer and the average age of vehicles is increasing.
That’s a boon for O’Reilly Automotive and should ensure a strong business for years to come despite the softening economy.
TJX Companies (TJX)
TJX Companies (NYSE:TJX) is arguably best known for its TJ Maxx stores. It also owns Marshalls and Home Goods as well. All of these outlets have a common theme: brand names at discount prices.
The company won’t report Q2 earnings until Aug. 16. That said, there are plenty of encouraging signs currently. There is a clear pattern emerging related to performance. TJX Companies looks to be in a strong position as inflation rises and consumers seek deals.
In the fourth quarter, the firm recorded EPS of 78 cents, slightly below consensus expectations of 91 cents. But remember, that was when the inflation discussion was really beginning in late 2021. Then, in Q1, the stock bested EPS expectations by about 8 cents.
TJX Companies is dealing with multiple headwinds, including waning consumer sentiment, but should fare well. The stock is roughly 20% undervalued based on price target alone and looks solid currently.
Undervalued Retail Stocks: Dollar General (DG)
There’s plenty to like about Dollar General (NYSE:DG) stock. In the near term, investors should take comfort in the fact that EPS expectations have risen from $2.90 to $2.92 for the second quarter. Those results won’t be available until late August, but the company seems to be poised to continue to head in the right direction.
And makes no mistake, DG stock has undergone a meteoric rise over the past few years. Since 2015, the stock has appreciated roughly 250%. That impressive growth was overseen by CEO Todd Vasos and COO Jeffery Owen. Some pundits were worried that Dollar General might suffer now that Vasos is stepping down from his role as CEO. However, Owen will be assuming his position and has been at the company for 30 years. Therefore, it’s fair to assume that he was as much a part of the firm’s recent growth as anyone else.
The company is in good hands and is likely to see increased traffic the weaker the economy becomes.
If Needham analyst Anna Andreeva is to be believed, then Chewy (NYSE:CHWY) stock will soar. That assertion is underpinned by the notion that online sales of pet products are essentially recession-proof.
Data suggests that demand for pet products is inelastic and defensive. In other words, people buy things for their pets no matter what is happening in the broader economy. Chewy should indeed be fairly inelastic given that 70% of its revenues come from auto-shipped products. The automated aspect makes it that much less likely for spending to decrease, as consumers would have to unsubscribe.
Chewy’s Q1 earnings report reflected strength as well. Sales increased 13.7%. That said, the company isn’t immune to broader, industry-agnostic trends. Net income figures took a dramatic hit. Despite the weaker bottom line, CHWY stock has appreciated in price following the news.
Undervalued Retail Stocks: JD.com (JD)
One of few persuasive arguments against buying JD.com (NASDAQ:JD) stock is the simple refusal to buy Chinese firms. Investors who maintain that argument undoubtedly affect share prices of JD stock.
But that’s the opportunity being presented to other investors. Chinese firms continue to be discounted, and JD stock is no different.
Once you ignore the noise, what’s left is a company that is rapidly improving. Take, for example, the company’s EPS projections. Three months ago, the markets expected JD.com to report EPS of 5.5 cents in the coming quarter. That figure now stands at 40 cents.
The opportunity is entirely evident. For those willing to bet that fears surrounding Chinese equities will subside, there’s roughly 33% upside baked into target prices.
The firm’s compound annual revenue growth has been extraordinary, and it’s a great way to gain exposure to the Chinese market.
Investors who like the current business case that O’Reilly Automotive represents but also want a bit more upside should consider CarParts.com (NASDAQ:PRTS) stock.
The Torrance, California-based firm sells aftermarket auto parts like O’Reilly. However, it does so solely online and has a market presence in both the U.S. and the Philippines.
One of the more appealing aspects of investing in PRTS stock is that it carries a unanimous “buy” rating and 100% upside based on consensus target prices.
The company has recorded eight consecutive quarters of sales growth, along with $582 million in revenue. Those revenues are expected to reach $668 million this year and $776 million in 2023.
Again, more U.S. consumers are driving older model vehicles than ever before and for longer. Companies like CarParts.com are benefiting from the ongoing secular trend.
Undervalued Retail Stocks: MercadoLibre (MELI)
MercadoLibre (NASDAQ:MELI) stock represents the online retail champion for all of Latin America. The Uruguay firm has been compared to a certain U.S.-based ecommerce giant.
But what investors should know is that MercadoLibre is rapidly growing and still possesses lots of upside. The question for investors is, do you believe that the company can build a payment system and logistics while balancing against rapid growth? So far, the answer has been ‘”yes.”
The company sold more than $28 billion in merchandise in 2021, up from about $21 billion in 2020. This year that should translate to roughly $10.46 billion in revenues, which should grow to $13.37 billion next year.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.