Christmas in July: The Companies to Buy Now
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Whether you are a ditsy shopper who waits until the very last minute or the uber Martha Stewart who bought all the gifts in a previous lifetime and have already wrapped them in color coordinated paper with name tag attached ( if you are, I hate you already), now is the time to think about holiday retail.
Some stores will begin the run up to the holidays as early as August 1, so there's no time to lose in making gains. Three retailers that cover high end to lower end should perform well and they are: Nordstrom (NYSE: JWN), Macy's (NYSE: M), and surprisingly, Dollar Tree (NASDAQ: DLTR).
The best in customer service
Specialty retailer Nordstrom has a low-end kicker with its 124 Nordstrom Racks, off price stores attracting the budget challenged aspirational shopper, and its full price stores carry the brands high-end shoppers covet.
The stock hit a 52 week high of $62.10 on July 5 and is trading at a trailing P/E of 17.23 with a 1.90% yield. It has regularly raised the dividend over the last four years, giving it a 17.47% dividend growth rate. The payout ratio is 31%. Just in February, Nordstrom announced an $800 million share buyback to be paid for with cash on hand and raised the dividend by more than 10%.
Operating margin at 10.81% is better than rival Saks' 4.54% and even Macy's 9.70%. The PEG is 1.39 and price/book is 6.30.
Revenue and earnings per share have grown steadily since 2010 from total revenue of $9.42 billion in 2010 to $11.71 billion in 2012 and earnings of $2.52 in 2010 to $3.33 in 2012. With two quarters reported so far, Nordstrom looks on track to bring in close to $13 billion in total revenue and $4.30 in total EPS for 2013.
Is it just the return of the high end shopper that is helping Nordstrom? Partly that, but the company has embraced technology with its e-commerce site Haute Look, and its use of iPads and tablets on the sales floor to order inventory from another store to help a customer or expedite check out.
Corporate governance risks are low in all categories for an overall score of 1, the best. This is important when you have legacy family members involved with a company that could skew shareholders' rights. Not so at this 112-year-old company which still has several Nordstroms in executive positions including Blake Nordstrom as CEO, but shareholders' rights are highly respected. Various Nordstrom family members own 18 million shares for close to a 10% stake.
It has also not succumbed to the ever-present danger of family-run companies, doing things just like dear old Granddad. Its willingness to be fashion and future-forward and its unassailable reputation for the finest in customer service and commitment to local communities and its employees (who receive above average pay and benefits for retail) assured its listing in Motley Fool's 25 Best Companies in America for 2013.
The company is expanding at a reasonable 10% annual pace and currently has 248 bricks and mortar stores in 33 states.
A dollar at a time
Dollar Tree is also hitting 52-week highs. The chain of 4,671 stores in 48 states in the U.S. and Canada offers merchandise at a flat price of a dollar. The PEG is 1.01 and it trades at a forward P/E of 16.21 and a price/book of 6.70. Operating margin is better than Nordstrom and Macy's at 12.59%.
Although it doesn't pay a dividend, its growth is worth it as analysts expect 18.33% five year EPS growth. However, Standpoint Research downgraded it from Buy to Hold on July 2. This may reflect valuation concerns with the stock having run from $37.12 in November to a high of $57.00 on July 5.
The company reported strong Q1 results on May 23 with an expansion of 20 basis points in gross margin, now at 35.20%, an 18% increase to EPS, and the opening of 94 new stores. The company also announced it had repurchased 1.5 million shares. This is on top of strong Q4 results of their first $2 billion quarter, one dollar at a time. CEO Bob Sasser announced plans to expand frozen and refrigerated food offerings to 475 more stores and Canadian expansion ambitions from 140 stores currently to a possible 1,000 stores.
The company is rolling out new Deal$ stores which offer items at a discount but at more than a dollar. Sasser said it's early days, but the Deal$ stores are doing well so far.
This is anecdotal, but if you had visited a Dollar Tree in the month between Black Friday and Christmas of last year, you would know this is the ditsy shopper's store of last resort with wrapping paper, cards, little gifts, and fixings for the feast.
The holiday department store
Macy's is the holiday department store, the subject of films, Miracle on 34th Street and Mame, the best run of the department store sector. It continues to localize its offerings, the My Macy's program. It too, has the best corporate governance risk score of 1.
The company is 183 years old and based in Cincinnati, but carries the latest designers and easily outperforms department store rivals Kohl's and J.C. Penney.
The company operates 840 Macy's and Bloomingdale's stores in 45 states along with rapidly growing e-commerce sites. It's tech-friendly as last holiday season it partnered up with eBay's PayPal with an app to help shoppers save time.
The stock is up 43.80% over the last year and is still trading at the lowest forward P/E of these three at 11, and offers a 2.10% yield at a payout ratio at 24%. It has been raising dividends with a three-year dividend growth rate of 58.62%. Macy's has the lowest PEG and price to book at 0.87 and 3.11, respectively.
Caveat: while Macy's has enjoyed 36.63% EPS growth over the last three years, analysts see a 14.38% five-year EPS growth rate going forward.
Buy presents for your portfolio early
If you want growth, buy Dollar Tree, but if you want a play on both ends of the barbell, buy Nordstrom. For value, put Macy's on your shopping list. Doesn't your portfolio deserve a little present?
Buy retailers now before the holiday hoopla. You may be a last-minute shopper but no need to be a last-minute investor.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!