4 Top Large-Cap Stocks Are the Best Way to Play the Retail Rebound

March 13, 2019 by 247lee

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When the economy is driven in large part by the consumer, slowing retail numbers are a worrisome sign for Wall Street. However, some great earnings numbers and, most importantly, an increase in the recent retail sales data have many investors fired up about the potential for a solid spring and summer. With winter drawing to a close, and some of the bad weather abating, now may be the time for investors to go shopping for top retail plays.

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Given the positive recent positive retail sales numbers and the good earnings, it makes sense to stay with the biggest retailers, as they have the ability to increase advertising and utilize brick-and-mortar stores along with the internet.

We screened the Merrill Lynch retail coverage universe and found four large-cap stocks that are rated Buy, pay good dividends and look like the best way to play the turnaround.

Costco Wholesale

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 could bode well for 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, especially after posting strong fiscal second-quarter numbers.

Costco shareholders are paid a 0.99% dividend. The Merrill Lynch price target for the shares is $255, and the Wall Street consensus price objective was last seen at $241.27. The shares closed Tuesday’s trading at $232.96 apiece.

Kohl’s

This top retailer recently posted outstanding quarterly results. Kohl’s Corp. (NYSE: KSS) operates department stores in the United States that offer private label, exclusive and national brand apparel, footwear, accessories, beauty and home products to children, men and women customers. The company also sells its products online at Kohls.com and through mobile devices.

While many retail chains have suffered some from internet pressure, Kohl’s has held its own as consumers see the company as a solid discount retailer. In an ironic turn, Amazon is still growing its partnership with the department store chain. Last summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at 10 of its stores. Kohl’s will be accepting Amazon.com returns at certain U.S. locations as well.

Investors in Kohl’s are paid a 3.85% dividend. Merrill Lynch has a price target of $80, but the posted consensus target is lower at $76.25. The stock closed trading at $69.70 a share on Tuesday.

Target

This stock remains a solid and safe retail total return play now. Target Corp. (NYSE: TGT) is one of the largest discount retailers in the United States, operating roughly 1,800 Target stores across the country. The company sells merchandise in its Signature Categories Style, Baby, Kids and Wellness, as well as other products in both physical Target stores and online at Target.com.

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Since 2017, Target has poured tons of money into its e-commerce offerings, overhauling its stores and refreshing its inventory to better compete against Amazon. Target has even embraced the same-day delivery concept and is expanding retail floor space for toys as it looks to scoop market share after the closing of Toys “R” Us.

Solid numbers and a very positive recent analysts day had the Merrill Lynch analysts noting that they believe the company’s ability to moderate fulfillment costs through its “stores as hubs” model should drive margin improvement in fiscal 2020. They also feel the valuation is compelling at current levels.

Target shareholders are paid a stellar 3.36% dividend. The $100 Merrill Lynch price objective on the shares is well above the $85.73 consensus target. The stock closed most recently at $76.18.

Walmart

The giant retailer is still on sale after trading sideways for much of this year. Walmart Inc. (NYSE: WMT) is the world’s largest retailer, operating retail stores under the formats of Walmart Stores, Supercenters, Neighborhood Markets, as well as Sam’s Club locations, in the United States, and it has a growing e-commerce business (including Jet.com). Internationally, Walmart also operates locations in several countries, including Argentina, Brazil, Canada, China, Japan, Mexico and the United Kingdom.

Each week, nearly 260 million customers and members visit the company’s 11,535 stores under 72 banners in 28 countries and e-commerce sites in 11 countries. With fiscal year 2017 revenue of nearly $486 billion, Walmart employs approximately 2.2 million associates worldwide.

The company announced in the summer plans to acquire a 77% stake in India e-commerce retailer Flipkart in a $16 billion debt and cash transaction. The deal dramatically expands Walmart’s presence in India, where online retail is growing quickly and Flipkart is a leader.

Walmart shareholders are paid a 2.16% dividend. Merrill Lynch has set its price target at $120. The posted consensus target is $109.07, and the shares were last seen trading at $98.37.

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These four large-cap retailers look to have good upside to the Merrill Lynch price targets and pay dependable dividends. With unemployment low and the workforce growing, it’s a good bet they will continue to post solid results.