What are retail stocks?

What are retail stocks?

Beginner

1st September, 10:14
Updated: 23rd September, 07:20

Looking for stocks that fare well when the economy is performing well?

Retail stocks could be for you. In this lesson, we’ll explain what retail stocks are, as well as their typical characteristics and why you might consider investing in them. We’ve also prepared a list of retail stocks you can consider for potential buys.

What are retail stocks?

Retail stocks are stocks of companies that sell various consumer products. Home improvement store chains, electronics stores, and clothing stores are just three examples of the many kinds of retail companies in operation. 

Why do investors look for retail stocks?

Retail stocks are extremely sensitive to the state of the economy. People buy far fewer refrigerators, laptops, and suits when the economy’s in a recession and uncertainty sets in, but the rush of retail spending that occurs during economic boom times makes retail stocks attractive buys if you time them right.

What are the defining characteristics of retail stocks?

1) They’re highly sensitive to consumer spending trends

It’s pretty simple: Retail stocks tend to thrive during times of economic expansion, and fall during recessions. Pay close attention to macroeconomic trends such as consumer spending and jobs reports if you plan to be an active investor in retail stocks. 

2) They move fast

Retail trends can change at lightning speed. Today’s hot tech gadget, Christmas toy, or outfit could lose its cool factor by tomorrow and have an impact both on the company that makes them and the shops that profit from selling them. The best retail companies are highly responsive to changing trends, putting out products that appeal to consumers and not resting on their laurels.

3) Some retailers carry thin profit margins

Retail companies such as grocery store chains operate with very thin profit margins. That means they have to do a lot of business to generate the kind of volume they need in order to keep growing. On the plus side, grocery store chains are more or less recession-proof, because people always need to eat, but if incomes fall then people’s spending habits change and higher-end food stores can find themselves losing customers.

4) They must be adaptable to changing technological trends

The rise of Amazon has knocked bookstore chains, mom-and-pop stores, and even bigger chains out of business. To survive and prosper, retail companies need to build their own robust online presence and have a brand that goes beyond the high street.

Here are some examples

The following are some examples of prominent retail stocks you might consider adding to your portfolio, along with a quick summary of each. 

1) TJX Companies (TJX)

The department store chain operator saw its stock tumble in March 2020 amid economic pressure from the coronavirus-induced global lockdowns. The stock then jumped 45% from that point to its close on June 10. This shows that, while volatility can affect retail stocks, resilient brands can bounce back fast.

2) Home Depot (HD)

One of the top-performing retail stocks of any kind in the world, Home Depot soared to an all-time high in late May 2020, and has kept climbing since then. The home improvement chain’s stock complements that incredible price performance with a 2.3% dividend yield.

3) Chipotle Mexican Grill (CMG)

It’s odd to imagine restaurant stocks doing well during a global pandemic, but Mexican restaurant chain Chipotle has shrugged off the fears of spring 2020, nearly doubling in price from its March lows by the time June came around.

4) Domino’s Pizza (DPZ)

A restaurant chain that specialises in delivery service can reap the benefits of global stay-at-home conditions. So it has been for Domino’s, the billion-dollar pizza chain that’s trading at an all-time high, with its stock up more than twofold since October 2017.

How do I find retail stocks?

Investment websites such as MarketWatch and Yahoo Finance offer screening tools that will help you find the best retail stocks, based on parameters such as earnings growth and revenue growth. You can also find some of the best retail stocks right here on this site, with our monthly lists of retail stocks on the rise.

Visit this guide for more information on how to find retail stocks > 

Now you have a better understanding of retail stocks, click to check out our next lesson – this time on telecommunications stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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