The retail sector has been hit hard recently, with the SPDR S&P Retail ETF (XRT) down 13% from a swing high in December. The sell-off has created opportunities for both swing traders and investors in the sector. For swing traders, many quality companies have stock prices trading near support. That could mean a high reward-to-risk trade if the stocks head higher off support. For the investor, a handful of retail stocks are trading cheaply relative to earnings and forward earnings.
Bed Bath & Beyond Inc. (BBBY) is trading at one of the lowest P/E ratios in 10 years (less than 9). The stock is in a downtrend and made a new 52-week low on March 7. There is no reason to try to pick the bottom. The price has been making slightly lower lows over the last year and then bouncing. Therefore, short-term traders may want to look at buying the stock when it pops back above $40. This would provide some evidence that this pattern is continuing and that support near $39 is still relevant. Consider an exit near $45, along with the descending trendline extending back to early 2016. Investors may wish to hold for a longer-term gain. A price target of $60 or even $70 would still be less than 15 times earnings when most of the stocks on the S&P 500 are trading near or higher than 20 times earnings.
Office Depot, Inc. (ODP) rallied aggressively in late 2016 but has pulled back since December. During February the price has found support at $4.15, bouncing off that level (or very close to it) on three occasions. Swing traders could attempt to get in near this support level, with a stop loss not far below. A very short-term price target is $4.75. A more aggressive target is $5.60 to $6, which is a potential resistance area from when the price gapped lower last May. Office Depot has a checkered past for profitability, but investors who believe the company can maintain profitability and keep forging ahead can currently buy the stock well below a P/E of 10. The long-term chart also reveals that the stock is trading near a rising trendline (intersecting just above $3) going all the way back to 2009. If the price bounces and continues to move within this big cycle, the stock could be trading above $8 in the next two or three years.
GameStop Corp. (GME) is trading near its lowest P/E valuation in 10 years. The company has an excellent track record of profitability but has been struggling to gain traction with its stock price. The stock hit a low of $20.01 in November and has managed a short-term bounce to close at $24.67 on March 7. Between $20 and $15 is a big support area that extends back to 2008. While the stock has shown it can stay in that region for long periods of time, historically buying between $15 and $20 has resulted in the price moving to at least $25 or higher. Swing traders may want to get in for these $5 to $10 swings, but the stock better suits an investor who is patient enough to wait for a good entry near $20 (or below), and then wait for it to rally above $25. Over the long-term, the stock could move back into the $40 region, where it traded frequently in 2013 through late 2015. Even with a rally like that (to $40) the stock would still be trading at less than 15 times earnings.
The Bottom Line
Recent weakness has a handful of retail stocks trading at very attractive valuations, while much of the U.S. market is trading at high valuations (high P/E ratios). The stocks also have some short-term and long-term technicals going for them. Whether it is long-term cycles or support levels, these stocks are at or near levels that have historically been pretty good buying opportunities.
Disclosure: The author doesn't have positions in the stocks mentioned.