If 2024 is any indication, those interested in retail stocks should look to the VanEck Retail ETF (NASDAQ:RTH) for inspiration rather than the SPDR S&P Retail ETF (NYSEARCA:XRT).
The former tracks the performance of the MVIS US Listed Retail 25 Index, while the latter follows the S&P Retail Select Industry Index. The two ETFs own 25 and 79 retail stocks, respectively.
How have they done so far in 2024? RTH is up nearly 9% year to date, almost 5x the performance of XRT, and 17 basis points up on the S&P 500. RTH has beaten them over the past five years, up more than 91%, 20% higher than the index.
RTH’s secret sauce is investing in 25 of America’s largest retailers. This is comforting at a time when many retailers aren’t experiencing growth due to higher prices and interest rates.
I’ve taken the holdings from RTH and selected three that 60% of analysts rate as a buy.
Amazon (AMZN)
Amazon (NASDAQ:AMZN) is RTH’s top holding, accounting for 21.55% of its $210.1 million in net assets. Sixty-two analysts cover its stock, with 95% rating AMZN stock as a buy. It’s in a league of its own with analysts for many reasons.
Between AI, the cloud, Prime memberships and advertising revenues, Amazon has a plethora of revenue streams to draw from at any point in the economic cycle. That makes it almost recession-proof.
To continue generating significant profits, the company hasn’t been timid about cutting costs, laying off hundreds of employees from its AWS cloud business in 2024. According to comments from an AWS spokesperson in early April, Quartz reports:
“We’ve identified a few targeted areas of the organization we need to streamline in order to continue focusing our efforts on the key strategic areas that we believe will deliver maximum impact.”
Over the past two years, it has cut over 30,000 jobs from its headcount. While that seems like a lot, at the end of December 2023, it amounted to less than 2% of its workforce .
Profits are back in a big way and rapidly growing despite Amazon’s significant investment ($4 billion in Anthropic alone) in AI.
Walmart (WMT)
Walmart (NYSE:WMT) is RTH’s fourth-largest holding, accounting for 7.24% of its $210.1 million in net assets. Thirty-nine analysts cover its stock, with an 85% rating of WMT stock as a buy.
Walmart has had a solid year in the markets, up more than 13% YTD and 78% over the past five years. It used to be an excellent defensive stock to own, but in the past two years, it’s gone on the offensive to capture market share and grow its top and bottom lines.
I can’t remember the last time Walmart did a stock split. Yet, on Feb. 26, it issued three new shares for every one held by shareholders. Not surprisingly, large companies whose stocks are appreciating can become too expensive for their own employees to buy, so cutting the share price by two-thirds will encourage greater uptake.
Statistics show that moves like these generally don’t make much of a difference. Furthermore, with share fractionalization, employees can buy Walmart stock with relative ease. On the plus side, however, stock splits indicate a high level of confidence from management.
Due to its value proposition, the discount retailer attracts customers from every income demographic. I expect that analysts will continue to favor WMT stock, as it’s a long-term buy.
Lululemon (LULU)
Lululemon (NASDAQ:LULU) is the 14th-largest holding of RTH, accounting for 2.42% of its $210.1 million net assets. Thirty-five analysts cover its stock, 71% rating LULU stock as a buy.
In recent weeks, the lifestyle apparel and footwear brand’s management has been far more cautious about its business than in the past. This has put a cloud over its share price, which is down more than 31% in 2024. It now trades at its lowest point since March 2023.
I suggest buying a little now and waiting a couple of quarters to see how this recent weakness plays out. One could also purchase some put options to protect their downside. I’d back up the truck if it falls below $300 in 2024.
As they say, insiders sell for various reasons; they buy for only one.
Barron’s reported on April 5 that Lululemon chair Marti Morfitt bought 3,200 shares of LULU stock between March 26 and 27 at an average price of $389.06. Since then, the shares have been down nearly 10%. This was Morfitt’s first buy on the open market since June 2021.
With LULU expected to generate at least $10.7 billion in 2024 revenue and analysts calling for $14.17 a share in earnings and $15.87 in 2025, it trades at just 22 times its 2025 earnings.
On the date of publication, Will Ashworth did not have (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.