Upon a quick look at the stock market, one can spot multiple retail stocks that appear undervalued. However, investing in retail stocks can be challenging due to their cyclical nature and competitive end markets. Despite this, successful execution can result in significant returns.
I conducted research on the retail sector to identify potential investment opportunities. To ensure that my picks had a solid foundation, I analyzed the fundamental aspects of each stock. I also evaluated the quantitative variables of each stock to ensure that they were aligned with my criteria. Additionally, I examined the technical features of my picks to take into account the stock market’s prevailing sentiment as a contributing factor.
Although some may not share my opinion, I hereby present three undervalued retail stocks that you can consider if you also believe in this sector’s potential.
Compagnie Financière Richemont SA (CFRHF)
JPMorgan listed Richemont (OTCMKTS:CFRUY) as one of its top European picks. Even though JPMorgan’s rationale is opaque, I concur with the pick as I believe Richemont is undervalued.
Richemont’s stock has delivered a total return worth approximately 1.3x in the past five years. Although some might suggest that a correction is due, I beg to differ. Richemont’s five-year average return on common equity ratio of 11.5% reflects quality and is above the industry average for a reason.
The company sells Veblen goods, which are high-quality goods considered to be status symbols, of which the price increases as demand increases. Veblen goods perform throughout the economic cycle due to the robust spending power of their end market. Moreover, Richemont established itself as one of the largest luxury goods retailers in the world, providing it with an array of microeconomic advantages.
The factors mentioned above are echoed by Richemont’s earnings report for the first half of fiscal 2024 (European companies often report earnings two times year instead of quarterly), which saw the firm’s revenue surge by 6% year over year to 2.601 billion euros (approximately $2.8 billion). Among its key drivers were a 14% increase in Asia Pacific sales and a 10% increase in Jewellery Maisons. These factors provide key areas of growth due to the emerging upper class in Asia and the high barriers to entry in the luxury jewelry business.
Richemont’s fundamentals link with its key valuation metrics. For example, Richemont has a price-to-earnings-growth ratio of 0.7x, communicating the velocity of the company’s earning growth. Additionally, Richemont has a five-year average dividend yield on cost of 3.8%, which adds a floor to its stock price.
Rent The Runway (RENT)
If you’re looking for a hybrid between value and momentum, look no further.
Rent The Runway (NASDAQ:RENT) is a U.S.-based e-commerce site that allows users to rent, buy, and/or design apparel. The company’s early stage nature means its stock price is prone to volatility. However, recent events suggest positively skewed returns are en route.
The firm released its fourth-quarter results in April, revealing a quarterly revenue number of $75.8 million, surpassing its estimate by $1.39 million. Moreover, Rent The Runway issued guidance for positive revenue growth in 2024, with a likely growth rate between 1% and 6%.
The company’s revenue beat and guidance might not seem like much. However, its stock price more than doubled after the announcement. Investors’ reaction comes as no surprise as the lower end of the retail market faced immense pressure toward the back end of last year due to disinflation and resilient interest rates.
Despite surging by more than 1.5x in the past month, RENT stock remains grossly undervalued with a price-to-sales ratio of 0.1x. Although risky, RENT stock looks like a potential multi-bagger.
Nike (NKE)
Many might say that Nike (NYSE:NKE) is a mundane pick. However, key indicators suggest the stock is well-placed and ready to prosper. So, why wouldn’t I add it to the list?
Nike is poised to benefit from seasonal tailwinds created by its new summer product line. Moreover, the Summer Olympics is around the quarter, allowing Nike to rake in traction via its sponsorship campaigns.
Furthermore, Nike strolled past its earnings estimates for the fiscal third quarter of 2024. The retailer beat its revenue target by $130 million and its earnings-per-share target by 23 cents. Among its key drivers for the quarter was a 2.4% year-over-year increase in footwear sales and a 20.8% increase in equipment sales. Additionally, Nike’s consolidated China revenue increased by 5% year-over-year to $2.08 billion, conveying the systemic growth provided by the region.
Lastly, Nike looks good from a capital markets perspective. For example, the stock’s price-to-earnings ratio of 27.5x is at a 34% discount to its five-year average. Additionally, Nike has a forward dividend yield of 1.6%, which blends income-based returns into its valuation.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
