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Stocks  | November 6, 2019

When it comes to retail stocks, most readers focus on four key names — Walmart (NYSE:WMT), Target (NYSE:TGT), Costco (NASDAQ:COST) and the disruptor in recent years, Amazon (NASDAQ:AMZN). These companies tend to draw most of the attention.

Admittedly, with the change in the sector wrought by Amazon, many investors wonder what to make of both traditional retailers and rising stars on the e-commerce front. Indeed, many traditional retailers have shut their doors. Also, the American landscape is littered with former malls and other retail spaces left abandoned.

Nonetheless, these four are hardly the only stocks to buy in this sector. Other under-the-radar retailers have figured out how to adapt and thrive in this changing environment. Consequently, investors should pay more attention to other merchants, particularly these seven retail stocks to buy.

Retail Stocks to Buy: BJ’s Wholesale Club (BJ)

Compared to other retail stocks, BJ’s Wholesale Club (NYSE:BJ) tends to be an afterthought. Since its 217 clubs are mostly on the eastern seaboard, it does not receive as much attention as its most direct peers in warehousing retailing, Costco and Sam’s Club.

Admittedly, if it plans to go national, it will take decades. However, in recent years, BJ’s has moved into Ohio and Michigan. This go-it-slow approach seems to work well, as the company is on track for 12%-plus earnings increases both this year and next. Moreover, at a forward price-to-earnings ratio of 16.2, BJ stock exhibits profit growth higher than Costco at half of the earnings multiple.

Furthermore, BJ stock has not existed for long. Despite origins going back to 1984, it has only existed independently as BJ’s Wholesale since 1997. It also waited until last year to launch its IPO.

For now, BJ stock suffers from a lack of exposure. It opened trading in June 2018 at $20.25 per share. Now, more than 16 months later, it sells for about $27 per share. Given this dynamic, nobody knows when it will draw more significant investor attention. However, once more investors discover that it offers higher growth than Costco at a lower price, they will likely flock to BJ stock in increasing numbers.

Burlington Stores (BURL)

Burlington Stores (NYSE:BURL) began as Burlington Coat Factory, a one-store family retailer in Burlington, New Jersey. Today, it has shifted its “off-price” model to other types of clothing and has expanded to 691 stores in 45 states and Puerto Rico. Many now regard this company as a leader in the off-price segment.

However, it has managed to thrive as a growth name despite the highly competitive nature of its industry. It credits a multi-channel strategy and expansion for growth. For fiscal 2019, it planned to open 50 new stores. Despite the national footprint, the company believes it can still drive significant growth. It plans to do that by taking its model by going into the home, beauty and gifts segments.

This may explain why BURL stock rose 18% in one day following its second-quarter earnings report in August. Not only did it beat revenue and earnings estimates, but it also raised guidance. While I would not expect a repeat of that, it speaks to the strength of BURL.

Although it has pulled back modestly since the post-earnings uptick, it trades at around 24.1 times forward earnings. However, analysts forecast 12.1% earnings growth for the year, and 14% in the next annual period. They also predict similar growth beyond next year. This should bolster BURL stock as the company continues on its current path.

Dollar General (DG)

Dollar General (NYSE:DG) has distinguished itself among retail stocks by becoming a leader in what some regard as the “extreme discount” segment. The company operates more than 15,000 stores across 44 states. It sells a variety of items including groceries, snacks, beauty supplies and housewares.

Dollar General has shown that it can prosper in any economy. Additionally, a recession would probably boost profits further as more families cut spending. Hence, holders of DG stock need not worry about the economy.

Furthermore, it has outperformed archrival Dollar Tree (NASDAQ:DLTR) in recent years. Dollar Tree bought out Family Dollar in 2015, a store with a business model more comparable to Dollar General. However, Family Dollar has not performed to expectations since the takeover, and DG stock has benefitted from the rivalry since that time.

For this year, analysts forecast profit growth of 10.7%. They believe that it will grow to 11.5% in the next fiscal year. Since it trades at 21.7 times forward earnings, DG stock is a little more expensive than its retail offerings. However, with expansion continuing, and a business model that prospers in almost any economic environment, investors likely have a long-term winner in Dollar General stock.

Five Below (FIVE)

Five Below (NASDAQ:FIVE) also belongs in the extreme discount sector of retail stocks. However, it differs from Dollar General in two distinct ways. As the name implies, it began offering items for $5 or less. However, now some “extreme discount” items sell in the under $10 range. Moreover, unlike Dollar General, it targets children and teenagers.

Five Below is a chain on the path to going national. If the history of retailers such as Walmart serves as an indication, the regional to national transition should benefit holders of FIVE stock. Five Below now operates about 850 stores in 36 states.

As a stock selling for 34 times forward earnings, it has become pricey. However, revenues will grow by more than 20% both this year and next. Also, Wall Street forecasts average annual profit increases for the next five years at 20.4%.

FIVE stock has plateaued over the last year. It peaked at $148.22 per share in the spring. After a summer correction, it trades at about $128 per share.

Given its specific niche, I do not expect the company to grow to the 15,000-store count of Dollar General. However, as it moves into new cities and states, I think both revenue and store growth will drive investor returns in FIVE stock for years to come.

Ollie’s Bargain Outlet (OLLI)

Another regional store looking to go national is Ollie’s Bargain Outlet (NASDAQ:OLLI). It began in 1982 as one store in Mechanicsburg, Pennsylvania. Today, the extreme discounter operates over 345 stores in 23 states. It will buy closeouts, overstocks, refurbishments and other goods, selling them at bargain prices.

As a regional discounter on the path to going national, Ollie’s is poised for continued growth. OLLI stock registers double-digit revenue increases consistently. As a result, analysts forecast average earnings increases of 18.2% per year for the next five years.

At a forward P/E of 29.1, OLLI stock is not cheap. However, since the spring, it has fallen from its all-time high of just over $103 per share and now sells for just under $67 per share. Since August, it has twice bounced back from the $55 per share range. This indicates the significant correction has ended, and that another growth phase may have just begun.

Speaking of growth, at 345 stores, it has about 2% of the store count of Dollar General and less than 10% as many U.S. locations as Walmart. This could make it one of the great growth stories among retail stocks. As it continues its nationwide expansion and moves into new communities, investors should profit from OLLI stock for years to come.

O’Reilly Automotive (ORLY)

O’Reilly Automotive (NASDAQ:ORLY) opened its first store in 1957 in Springfield, Missouri. Today, it currently operates more than 5,200 locations in 47 states.

Admittedly, size has meant little to some retail stocks in the face of online competition. However, O’Reilly is in a more advantageous situation than most retail stocks for two reasons. First, when cars break down, people usually want the replacement parts yesterday. This dramatically reduces the chances that customers will turn to an online retailer such as Amazon.

Secondly, the average age of cars on the road has risen to 11.8 years old. When one faces mechanical issues, this makes it more likely customers will look to buy a part from O’Reilly rather than shop for a new car.

These trends have boosted profit increases for ORLY stock. Average annual earnings growth came in 18.9% per year over the last five years. Wall Street expects it will slow to only 14.9% per year over the next five. This beats both AutoZone (NYSE:AZO) and Advance Auto Parts (NYSE:AAP), making the forward P/E ratio of 21.8 seem more tolerable.

Given profit increases, the aging of existing cars and the insulation from online competitors, ORLY stock should continue its march higher.

PriceSmart (PSMT)

American consumers may have little familiarity with PriceSmart (NASDAQ:PSMT). Based in San Diego, this spinoff from Costco operates 43 warehouse clubs in Central America, the Caribbean and Colombia.

Despite a relative lack of familiarity among retail stocks, it might make for a more profitable investment than its prosperous former parent. PSMT stock recently suffered a year-over-year earnings decline. However, that appears likely to become a one-time event. Wall Street predicts 15% average annual profit growth for the next five years. At a 23.9 forward P/E ratio, it trades at a lower multiple than Costco stock and offers higher growth.

PSMT stock continues to recover from an earnings miss that helped take it to the $48 per share level. Since then, it has begun to recover. Back in September, PSMT stock shot higher by 18% in one day as it joined the S&P SmallCap 600 Index. Despite rising to $76 per share, it remains well off the $90-plus per share levels it saw in recent years.

Moreover, InvestorPlace’s Ian Bezek speculates that it could become a takeover target. Walmart, Chile-based Falabella and Colombian retailer Exito could make such a move. Whatever happens, it appears PSMT stock has put its troubles behind it and is ready to resume a growth path.

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