Wall Street Very Positive on Retail: 5 Top Stocks to Buy Now

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It started kind of slow, but now that the full ramifications of the tax reform bill are being felt, not the least of which is more take-home pay for many workers, and that money is starting to find its way into the economy. While some may argue that wage growth is still stagnant, that may not be the case as we are getting very close to full employment. Plus, rising costs are leveling off, and that means consumers are even more likely to spend.

A new Jefferies research report focuses in on the companies that look to benefit from the surge in spending. They pointed to the top trends that could drive spending in the report:

Retail sales have faced a number of headwinds over the last several years, but with after tax incomes set to improve, healthcare spend as a percentage of personal consumption expenditures flattening, and consumer debt service ratios now sitting at close to the lowest levels in 40 years, there’s a good argument for better income translating to better retail sales going forward.

The Jefferies team focused on a wide variety of companies, but we screened for the pure retail plays as they should see the dollars flow directly to them.

Gap

This top retailer could be poised to benefit from the extra consumer spending. Gap Inc. (NYSE: GPS) sells private label merchandise through three main retail concepts: The Gap, Old Navy and Banana Republic, along with smaller growth vehicles Athleta and Intermix. The company also sells its products through its company websites. Most of its international stores are Gap stores, concentrated in Western Europe (France, United Kingdom), Japan, China and Canada. The company has over 3,500 stores worldwide.

Gap has had a solid run and Jefferies noted this in a past research report:

The company is well-positioned in the shifting retail landscape, as its e-commerce business is actually accretive and the company has already done the heavy lifting on omni-channel integration. They were among the first to market with find in store, reserve in store, ship from store, and order in store, and are amidst the rollout of the Buy online, pickup in-store or BOPIS, which should help drive even higher profitability online.

The company reported huge fourth-quarter results on Thursday after the close and also guided the rest of 2018 higher. This was the company’s fourth straight quarter of positive earnings surprises and the fifth consecutive sales beat.

Gap shareholders receive a 2.9% dividend. Jefferies has a $45 price target, and the Wall Street consensus target is $31.34. The stock closed Thursday at $31.70 but was almost 10% higher in Friday’s premarket.

Home Depot

This company remains the undisputed leader in the home improvement retail category and another solid stock to own when rates go higher. Home Depot Inc. (NYSE: HD) is the world’s largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico.

Home Depot stores sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM) and professional customers.

Shareholders receive a 2.29% dividend. The Jefferies price target for the shares is $223, and the consensus price objective is $212.74. The shares closed Thursday at $179.64.