Cash In on the Coming Consumption: 3 Retail Stocks to Buy Ahead of Rate Cuts

Stocks to buy

The simplest way to explain interest rates is that it’s the cost of money. When policymakers cut interest rates, the objective is to lower the cost of money. This translates into higher consumption and investment spending in the economy and GDP growth accelerates. Specific to the United States, consumption spending is one of the key GDP growth drivers. Within that, retail sales are an important catalyst.

In this article we will look at some of the best retail stocks to buy. U.S. GDP decelerated in Q1 2024 and there is a high possibility of multiple rate cuts in the next 12 to 18 months. I further believe that the first rate-cut will likely be before Presidential elections. This is likely to be positive for consumption spending and I expect retail sales to increase in the coming quarters. Therefore, it’s a good time to look at retail stocks to buy at attractive levels.

Target (TGT)

Image of the Target (TGT) logo on a storefront.

Source: jejim / Shutterstock.com

Target (NYSE:TGT) is among the most undervalued retail stocks to buy. TGT stock trades at a forward P/E of 16.2 and offers a dividend yield of 2.88%. I believe that a breakout is imminent after potential rate cuts.

For Q1 2024, Target reported a decline of 3.7% in comparable store sales. While this was negative, there are two important points to note. First, Target has guided for 0 to 2% increase in comparable sales for the full year. The coming quarters are therefore likely to be better. Spending boost on rate cuts might translate into earnings surprise.

Further, Target has continued to strengthen its digital business along with same-day fulfilment services. For Q1, digital sales and same-day services growth was 1.4% and 9% respectively. Once store sales also accelerate, the overall numbers are likely to be attractive.

I must add here that Target has continued to focus on efficiency. This, coupled with relatively low inflation, is likely to have a positive impact on key margins.

Walmart (WMT)

Despite Strong Earnings, It's Tough to Justify Walmart Stock's Valuation

Source: Jonathan Weiss / Shutterstock.com

Walmart (NYSE:WMT) has already witnessed a healthy rally of nearly 26% year-to-date. I expect the positive momentum to sustain on the back of healthy growth coupled with the impact of rate cuts.

For Q1 2024, Walmart reported revenue growth of 6% on a year-over-year basis to $161.5 billion. Further, for the full year, Walmart has guided for sales growth in the range of 3% to 4%. An important point to note is that the retailing giant reported 21% growth in global e-commerce sales. Strong omni-channel presence is likely to ensure that steady growth sustains at the company level.

Another important point to note is that Walmart reported 12.1% year-on-year growth in international sales in Q1 to $29.8 billion. Healthy growth was driven by Walmex in Mexico and Central America, Walmart in China and Flipkart in India. With presence in some high-growth markets, I expect international sales growth to remain robust.

Costco (COST)

A photo of a Costco Wholesale Corporation (COST) retail storefront.

Source: Shutterstock

Costco (NASDAQ:COST) stock has surged by nearly 60% in the last 12 months. At a forward P/E of 51, valuations might appear to be stretched. However, COST has historically traded at a premium valuation as compared to peers. I would look at small corrections as an opportunity to accumulate COST stock.

It’s not just about valuation premium, Costco has been delivering stellar numbers. For Q3 2024, the company reported revenue growth of 9.1% YOY to $57.39 billion. Further, for the first nine months of fiscal year 2024, comparable store sales growth was robust at 5.4% with e-commerce sales growth at 14.7%.

Investors should also note that Costco is positioned to report annual membership fee of $4.4 to $4.5 billion. During the last quarter, paid memberships increased by 7.8% YOY. As membership fee continues to swell, Costco has robust free cash flow visibility.

On the date of publication, Faisal Humayun 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.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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