Now that markets are cooling following the results of the United States presidential election, investors may be wondering where the next best place might be to deploy some capital efficiently and safely. While there are many theories floating around in the market today, one particular sector could offer an attractive risk-reward tradeoff in the coming quarters.
That attitude could come from retail stocks, especially since they now have a lot of fundamental momentum behind them, coming from both the manufacturing sector and its distant cousin in the business services sector. Moreover, short-term growth in the transportation sector, as seen in truck stock price movements, means a potential increase in consumer activity, leading markets to the retail sector this time around.
To enhance this expansion trend, investors may want to explore SPDR S&P Retail ETF NYSEARCA:XRT as a varied way to experience a space. But for those who like to take more risks in exchange for potentially better rewards, there are two names:Floor & Decor Holdings Inc. New York Stock Exchange: FND And Shake Shack Inc. NYSE: SHAK— which offer above-average growth potential.
XRT: Key factors driving the retail sector’s comeback in 2024
Starting with the services PMI, investors can see that the retail industry posted the strongest gains last month after lagging due to a quarterly contraction. This expansion means increased business activity, new orders and all the good news that could lead to higher earnings per share (EPS).
In addition, there has been an increase in consumer spending as a percentage of GDP. The latest report shows that consumer spending rose 3.7% during the year. This should put to rest some concerns about cyclicality, letting investors know that the trend and conditions in retail stocks will remain strong in the coming months.
SPDR S&P Retail ETF today
SPDR S&P Retail ETF
(As of 11/22/2024 ET)
- 52 week range
- $63.01
▼
$81.19
- Dividend yield
- 1.60%
- Assets under management
- $409.22 million
And this is where the Retail ETF comes into play. Despite the fact that the price is already trading near its highs, the momentum remains, as do the fundamental reasons. Knowing that the trend here is favorable, some institutions have decided to buy the sector ahead of the wave.
Healthcare of Ontario pension plan participants decided to increase their ETF holdings by 44.7 per cent in the latest quarter, bringing their net position to $715.6 million, giving investors reason to consider adding retail investments to their portfolios.
Floor and decor: Why institutions and markets are bullish on stocks
Whether fears of inflation or an economic downturn become a reality should not matter for companies with large enough profits to weather the storm, and Floor & Decor’s gross margin is 43.6%.
These high margins allow management to retain sufficient capital from each sale to operate the business efficiently and profitably, as evidenced by a return on invested capital (ROIC) of 13.7%. Are these numbers enough to make markets buy the stock? For now they are.
Most recently, in November 2024, FMR LLC invested up to 34.7% more in Floor & Decor stock, bringing its position to a maximum of $622.8 million, or 4.7% ownership. Given that this acquisition comes after ETF buying activity, investors can conclude that the momentum has not yet slowed.
Flooring and decor inventory forecast for today
$104.37
-6.81% DisadvantageHold
Based on ratings from 20 analysts
| High forecast | US$140.00 |
|---|---|
| Average forecast | $104.37 |
| Low forecast | $75.00 |
Inventory forecast details for flooring and decor
Trading at a price-to-earnings (P/E) multiple of 57.4x today, Floor & Decor stock commands a significant premium to the rest of the building materials industry, as its peers trade at an average multiple of 17.8x today. While some may call it expensive, the professionals will say, “It’s expensive for a reason,” and investors can’t wait to find out what it is.
Ultimately, Piper Sandler analysts see a price target of $118 per share for Floor & Decor, implying additional upside of 14.2% from today’s levels.
Shake Shack: How margin expansion can drive stocks higher
With today’s market rewarding high margins as a way for investors to justify higher valuations for some stocks along with more buying decisions despite some concerns about a rebound in inflation, Shake Shack is emerging as a top buy target today.
Before COVID-19, Shake Shack had an operating margin of 67%, which is impressive for a restaurant stock. However, as management began investing heavily in technology and automation, not to mention a greater share of sales through digital channels, operating margins increased to more than 72%.
Shake Shack Stock Forecast Today
$112.94
-8.19% DisadvantageHold
Based on ratings from 17 analysts
| High forecast | $144.00 |
|---|---|
| Average forecast | $112.94 |
| Low forecast | $74.00 |
Shake Shack Stock Forecast Details
That growth is driving earnings per share higher, according to analysts, with earnings forecast to reach 35 cents over the next 12 months, up 40% from the current estimate of 25 cents. As with Floor & Decor, strong profitability and high growth rates justify the market’s willingness to pay a premium price for this stock.
Shake Shack shares trade at a price-to-book ratio (P/B) of 10.8x, which represents a significant premium of 63.4% compared to the retail sector’s average valuation of 6.6x today.
Before you consider Floor & Decor, you need to hear this.
MarketBeat tracks Wall Street’s top-rated and best-performing analysts daily and the stocks they recommend to their clients. MarketBeat identified five stocks that top analysts are quietly whispering to their clients to buy now, before the broader market takes hold… and Floor & Decor wasn’t on the list.
While Floor & Decor currently has a Hold rating among analysts, the top-rated analysts think these five stocks are Outperform Buys.
View five stocks here
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