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3 Specialty Retailers with Special Upside

It's been a rough year to be a retail specialist. Fortunately, the downturn has put these high quality retail stocks on the clearance rack.

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This story originally appeared on MarketBeat
  • The TJX Companies, Inc. (NYSE: TJX) is down 15% this year
  • DICK'S Sporting Goods, Inc. (NYSE: DKS) is in a slump down 26% year-to-date
  • Tractor Supply Company (NASDAQ: TSCO) is down 19% this year
  • Have we reached a breaking point for retail?

Whether defiant or stubborn, American consumers continued to spend in April despite persistent inflation at a 40-year high. U.S. retail sales increased for the fourth straight month in April as people kept paying more for cars, dining out, and electronics, not to mention gasoline.

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Yet with the month-over-month growth in retail sales slipping to 0.9% in April, consumers may be nearing their limits. Cutbacks on discretionary purchases seem inevitable with the dollar able to stretch less these days. Then again, with the summer travel season ahead, retail sales could continue to climb.

The retail sector is a tricky group to invest in given the macroeconomic backdrop and rapidly evolving shopper habits. It's also a challenging group for investors to get right because there are so many subsets of retail—supermarkets, drug stores, department stores, and more.

Then there are the leftovers which get lumped into the specialty retail industry. Apparel, electronics, home improvement, auto parts, and furniture retailers hang out here.

It's been a rough year to be a retail specialist. The Dow Jones U.S. Specialty Retailers Index has plummeted 35% year-to-date amid a slew of disappointing Q1 results and outlooks.

Fortunately, the downturn has put these high quality retail stocks on the clearance rack.

Is TJX Companies Stock on the Comeback Trail?

The TJX Companies, Inc. (NYSE: TJX) is down 15% this year. If the clothing retailer is still in the red come New Year's Eve, it would be the first year since 2008 that it didn't finish higher.

The reasons for the pullback aren't uncommon to the apparel industry. The T.J. Maxx, HomeGoods, and Marshalls parent is dealing with higher freight and wage costs that are eating into profits. This has management projecting second-quarter EPS of $0.67 at the midpoint, a 16% year-over-year decline in profitability.

The outlook improves from there though, with analysts expecting improved merchandise availability and strong vendor relationships to drive bottom-line growth in the third quarter and beyond. The consensus forecast for next year's earnings growth is 15%.

Even if we enter a recession, TJX Companies is likely to perform well because it has done so during past economic downturns. It has also fended off the Amazon.com threat better than most due to its unique off-price assortment and appeal with back-to-school shoppers.

Yes, there's still time for the stock to extend its 13-year winning streak.

Is it a Good Time to Buy Dick's Sporting Goods Stock?

After hitting a double in 2021, DICK'S Sporting Goods, Inc. (NYSE: DKS) is in a slump down 26% year-to-date. Based on May 25th's high volume bounce, the stock appears to have found a bottom.

The catalyst was the retailer's first-quarter earnings report that couldn't have come at a more fortunate time with market sentiment finally on the rise. Even though economic uncertainty caused Dick's to lower its 2022 outlook, the stock, which had plunged 57% since September 2021, staged a 10% rally in 17x its 90-day average volume.

Management struck an upbeat tone about the company's longer-term growth prospects with near-term headwinds like supply chain disruptions expected to subside. Plus, pandemic-driven interest in outdoor activities like hiking, running, and golfing have staying power according to CEO Lauren Hobart. Consumer interest in Dick's private-label brands is also expected to support growth.

At the midpoint of its full-year EPS guidance, Dick's is trading at just 8x 2022 earnings. Over the last five years the P/E has averaged 12x. Even after a 33% recovery from its low, Dick's Sporting Goods is well worth a swing of the bat here.

Is Tractor Supply Stock Undervalued?

Tractor Supply Company (NASDAQ: TSCO) is down 19% this year after plowing forward in each of the previous four years. The supplier of all things farming has been slowed by the usual suspects of increased wage and transportation expenses. This resulted in first-quarter margin contraction that caused a selloff even though the company managed to beat earnings estimates for the ninth straight quarter.

With the market starting to recognize this overreaction, the stock gapped higher on Thursday and Friday and has a return to $200 in its sights. The timing looks good to climb aboard this bandwagon because the spring quarter is historically Tractor Supply's strongest. This is when farmers, ranchers, and landscaping crews go into high gear as do the retailer's profits.

In the quarters ahead, Tractor Supply is also positioned to benefit from the continuation of pandemic-era trends like home improvement projects, gardening, and at-home hobbies. This along with a pick-up in online sales has management anticipating 7% to 9% sales growth this year and EPS of $9.20 to $9.50.

This means that Tractor Supply shares are going for 20x this year's earnings estimate, a multiple that has climbed fast in recent days but remains below the stock's 22x historic average. The company's expansion in the pet industry through pet wellness centers also makes it worthy of a higher valuation.

Tractor Supply has one of the best balance sheets in retail that has allowed it to raise its dividend for 14 consecutive years. There are several signs pointing to this being a good time to cultivate a long-term position.

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