Even though the Federal Reserve has raised the federal funds rate on a consistent basis, for the most part the yield curve has yawned and flattened out over the past six months. The trend seems to be coming to an end as Wall Street anticipates another hike in the funds rate in December of 25 basis points, or one-quarter percent.
A new Jefferies research report notes that typically retailers do well in a lower rate environment but underperform as rates are pushed higher. According to the report:
In the rising rate cycles we studied, the yield curve flattened, the BWTL Index fell, loan growth ultimately softened and retail sales decelerated. There are still opportunities for individual retail names to outperform in a rising rate environment and it is usually tied to above average sales and earnings growth and positive earnings per share revisions.
Jefferies has spotted top stocks that generally in the past have performed great in rising rate scenarios. They also highlighted companies that have done well over the past quarter on a financial performance basis. We spotlight four that make sense for growth investors now, especially with the holidays right around the corner.
This may be a great stock to own going into the holiday selling season. Best Buy Co. Inc. (NYSE: BBY) is the top specialty retailer of consumer electronics. The company finished 2016 with 1,363 domestic stores, including 1,026 Best Buys, 28 Pacific Sales locations and 309 stand-alone Best Buy Mobiles. The company also offers a variety of high-margin services, through its Geek Squad and Magnolia home theater channels.
The company had a very positive Investor Day, and many on Wall Street are more positive on its leading industry position, online defensibility and long-term growth opportunities. The shares are down close to 10% since the Investor Day, likely on what was viewed as disappointing long-term EBIT guidance. There should be plenty of opportunities in new initiatives, and most analysts are very confident in management’s ability to overdeliver.
Best Buy investors receive a 2.39% dividend. The Wall Street consensus price target is $60.33, and shares closed Tuesday at $56.91.
This has become the ultimate destination for the American consumer regardless of the economy. Costco Wholesale Corp. (NASDAQ: COST) has a unique business model. It operates membership warehouses and the company buys the majority of its merchandise directly from manufacturers, essentially cutting out the middleman. Costco sells in bulk but also at a lower price, thus fueling its rapid growth. With consumers having more free cash to spend with gasoline prices still low, this major retailer may continue to see large revenue gains.
Costco remains one of the few conventional retailers where metrics like store traffic, market share gains and a validated model that could bode well in international growth and expansion. The company is largely unharmed by e-commerce, and it continues to add stores in strategically mapped out locations.
Wall Street loves the company’s pricing authority on key items and the leading merchandising offerings, and the company’s relatively new Costco co-branded card with Visa is a real positive. Add in the company’s growing online presence, and the future looks bright.
Costco shareholders receive a 1.2% dividend. The $181.41 consensus price objective compares with Tuesday’s close at $165.08.