Retail

Retail Stocks Crush the S&P 500 in Q4: 4 Top Picks to Buy Now

While we have suffered through the worst trading year in some time, one sector continues to march ahead of the rest at the end of the year, and there is no reason to think it changes anytime soon. A new research report from Deutsche Bank says not only should the outperformance continue, but the macroeconomic picture is lining up perfectly to supply the needed tailwinds.

The Deutsche Bank report notes that over the past five fourth quarters, the S&P Retail Index has increased an average of 7.7%, outpacing the S&P 500 by 6.9%. With gasoline prices at multiyear lows, better employment and a reasonably healthy U.S. economy, there is every reason to believe this string of outperformance continues.

Deutsche Bank has five top picks in the retail universe and all are rated Buy. We chose the four that appear to have the biggest upside potential: Best Buy Co. Inc. (NYSE: BBY), Dicks Sporting Goods Inc. (NYSE: DKS), Lowe’s Companies Inc. (NYSE: LOW) and Restoration Hardware Holdings Inc. (NYSE: RH).

Best Buy

With everything lining up and new products for the holiday selling season, this top stock makes sense now. Best Buy continues to combat challenging conditions by reducing costs, pricing competitively, optimizing stores and enhancing distribution. The store-within-store partnerships it has with suppliers like Samsung, Apple and Google are continuing to drive more store traffic and product sales. Best Buy’s online channel growth also looks very promising, as it continues to battle Amazon.

The company is expected to grow 2015 earnings by a very solid 27%. One other huge tailwind for the electronics giant is lower gasoline prices are continuing to put more money in consumers’ wallets. That could start to push discretionary buying even higher this year as wage growth also kicks in. A new PC cycle led by Windows 10, and a new iPhone 6s, could also provide a nice lift.

Best Buy investors are paid a solid 2.51% dividend. The Deutsche Bank price target for the stock is $42. The Thomson/First Call price target is $41.45. Shares were trading at $36.53 on Friday’s close.

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