While vaccinations continue to support the recovery, the number of infections from the delta variant has shaken people up quite a bit. As a result, investors could be feeling incrementally more cautious about reopening plays.
Added to that are concerns about the end of government support, the impending tapering, rising inflation, customer-facing operations closing down again, etc.
But I’m here to tell you that there’s reason to be optimistic. Not only do government reports indicate broad-based improvement across industries and sectors, albeit to varying degrees, but these positive findings are also reflected in management commentary.
That’s why we’re seeing so many retailers posting strong results. It’s why we’re seeing an increasing number of manufacturing companies reporting strong demand. It’s why office suppliers are seeing demand come back. And it’s also why there are supply constraints, transportation issues and labor shortage. This is definitely not a shrinking economy.
Any number of short-term issues can bring temporary hiccups. But we really shouldn’t let these get in the way of making money. The five stocks I’ve discussed below show how we are steadily climbing out of the situation-
Guess, Inc. (GES Quick QuoteGES )
Guess designs, markets, distributes and licenses casual apparel and accessories for men, women and children in the American lifestyle and European fashion segment. The company’s jeans, pants, skirts, dresses, shorts, blouses, shirts, jackets, knitwear, intimate apparel, jewelry and other fashion accessories are sold through retail, wholesale, e-commerce and licensing. Its five reportable segments are Europe, Americas Retail, Asia, Americas Wholesale and Licensing.
As of Jul 31, 2021, Guess directly operated 1,046 retail stores across the Americas, Europe and Asia. Including its partners and distributors, it operated in nearly 100 countries worldwide.
Like many of the other retailers, Guess was dealt a heavy blow by the pandemic and the company is still reeling under the impact. Several of its stores in the U.S. and Europe were permanently closed, which is a big drag on revenues. At the same time, its online channels did very well and continue to do well even as the market reopens.
The company has set itself an ambitious target of reaching $2.8 billion in revenues by fiscal 2024 and is working on its brand and customer experience to get there. In the meantime, the strong demand is helping it sell with less promotions, allowing better fall-through to the bottom line.
The Zacks Rank #2 stock with Value, Growth and Momentum Scores of A, topped estimates by 41.2% in the last quarter. In the last 30 days, its estimates for years ending Jan 2022 and 2023 are up 14.6% and 13.4%, respectively. Analysts currently expect its revenue and earnings to grow 35.0% and 4000.0% this year, followed by 6.5% and 13.4% growth in the next.
It also pays a dividend that yields 2.05%.
The Gap, Inc. (GPS Quick QuoteGPS )
With more than 3,800 stores worldwide, Gap is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products for men, women and children. It owns well-known Old Navy, Gap, Banana Republic brands, as well as the newer Athleta, Intermix and Hill City brands. Its four segments are Gap Global, Old Navy Global, Banana Republic Global and Other (includes the newer brands).
The company was severely hit by the pandemic last year, and despite the resurgence in its business this year, the recovery hasn’t been even across its stores and brands. But there were a couple of points of strength, the first being the ecommerce business, which picked up very strongly last year and remains robust this year, despite the reopening.
It currently generates about 30% of its business and management has plans to take that share to 50% by the end of 2023. Its recently-launched mobile app along with its omnichannel capabilities are expected to drive this initiative.
The other point of strength was at its Old Navy (affordable high-quality fashion for the whole family) and Athleta (value-driven active and lifestyle) brands. In fact, the strength in these segments (they were up double-digits from 2019 pre-pandemic levels) has had management rethink the whole business.
So they now intend to take these brands to 70% of the company’s business by 2023-end while closing underperforming Gap and Banana Republic stores. This is expected to realize $100 million in EBITDA savings on an annualized basis by the end of 2023.
The Zacks Rank #2 stock has a Value Score of B and Growth and Momentum Scores of A. Its 48.9% surprise in the last quarter was substantial although lower than the preceding two quarters. Analysts have been steadily raising their estimates for both 2021 and 2022 over the last three months.
And in the past 30 days, these estimates increased by 43 cents (24.2%) and 9 cents (3.6%), respectively. At current levels, these estimates represent 204.7% earnings growth in the current year ending Jan 2022 and 17.1% the following year on revenue that’s expected to grow 28.8% and 2.7%, respectively.
Gap also pays a dividend that yields 2.01%.
Canon, Inc. (CAJ Quick QuoteCAJ )
Canon provides professional-grade printing and imaging products for personal, business, industrial and medical use, as well as related consumables and supplies that enable businesses and consumers worldwide to capture, store and distribute visual information. Its product lineup includes office multifunction devices (MFDs), plain paper copying machines, laser and inkjet printers, cameras, diagnostic equipment, and lithography and other semiconductor/industrial equipment. The company also provides maintenance services; and supplies replacement drums, parts, toners and papers.
Canon is currently seeing broad-based strength in its business because of supportive factors across served markets. The ongoing reopening is helping sales of office MFDs and production printing. Related services and consumables are also on the rise.
Camera sales surged during the pandemic and remain robust today as more people are taking to photography as a hobby. Meanwhile, diversified applications of its network cameras, including remote monitoring and monitoring of congested and confined spaces, as well as conventional uses like crime prevention and disaster monitoring are leading to solid sales in that product line as well.
The ongoing recovery also remains positive for Canon’s medical devices, with particular strength in computed tomography (CT) systems and diagnostic X-ray systems across Europe, U.S. and Japan.
Semiconductor and flat panel display (FPD) lithography systems are also in high demand given the huge demand for applications using these products. While there remains some softness in OLED display manufacturing, this is mainly a timing issue as customers consider their own investment cycles. Memory devices, image sensors and automotive devices are other areas of strength.
A slight concern is the recent surge in COVID infections in Southeast Asia, which is already leading to production delays and therefore, some supply constraints in laser printers. A protracted period of uncertainty could lead to lost sales, as the very strong demand moves to alternatives.
As a result of the overall strength across its product lines, this Zacks Rank #1 stock with Value Score B Growth Score B and Momentum Score F reported an EPS surprise of 76.7% in the last quarter. What’s more, it represents an upward trend, indicating strengthening sales, most likely because it is such a solid reopening play.
Analysts are also extremely positive about its prospects, as seen from its steadily rising EPS estimates. In the last 30 days, these estimates have appreciated 7.6% (for 2021) and 5.4% (for 2022). This represents EPS growth of 142.1% this year and -0.7% next year on revenue growth of 8.7% and 2.6% in the two years, respectively.
What’s more, it pays a dividend that yields 2.65%.
Best Buy Co., Inc. (BBY Quick QuoteBBY )
Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services with operations in the U.S. (93% revenue share) and Canada (7%).
The company leverages its 1,126 large-format and 33 small-format stores (as of Jan 2021), distribution centers and online portal to deliver an omnichannel experience to customers. This came in particularly handy during the pandemic and should continue to serve the company well given that consumers still need tech products, they are sitting on growing savings because of the government stimulus, a strengthening labor market and limited options to spend (because of multiple waves of the pandemic). Programs like Total Tech Support and In-Home Advisor programs are facilitating consumer sales, as people set up and maintain their at-home working and schooling needs.
A strategic growth initiative dubbed “Building the New Blue” is on track, under which BBY is remodeling some stores, launching several new small-format ones and adding fitness, beauty, sleep, pain management, vision, hearing and electric transportation product categories.
After a solid EPS surprise of 56.0% in the last quarter (which continues an accelerating trend), this Zacks Rank #2 stock with Value, Growth and Momentum Scores of A, is seeing positive estimate revision trends. As a result, the last 4 weeks saw the Zacks Consensus Estimate for 2021 and 2022 jump 17.0% and 9.0%, respectively.
Revenue and earnings expectations for the current year represent 9.5% and 25.8% growth this year with small declines in the next. However, if estimate revisions continue at this pace, we will see growth in 2022 as well.
The company also pays a dividend that yields 2.51%.
Greif, Inc. (GEF Quick QuoteGEF )
Greif is a leading global producer of industrial packaging products (made of steel, fiber, plastic and paper), including remanufactured and reconditioned industrial containers and intermediate bulk containers (IBCs). It also offers container life cycle management, filling, logistics, warehousing and other services. The manufacturing is done in 40+ countries for sale into chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agricultural, construction, pharmaceutical and mineral products, packaging, food, auto and building products industries of North America.
Greif also owns 175,000 acres of timber property in the southeastern United States, which includes 18,800 acres of special use land with the goal of generating sustainable long-term yields.
While economic growth would be good for business overall, the company is currently seeing particular strength in chemicals and lubricants industries, as well as pandemic-driven strength in the food, pharmaceutical and household goods segments. The end market strength, along with strong global demand for rigid IBCs and strong paper pricing is driving current results. While raw material price escalation and labor market issues are ongoing, pricing actions are containing pressures on the bottom line.
As a result, this Zacks Rank #1 stock with a Value Score B, Growth Score D and Momentum Score A was able to top the Zacks Consensus Estimate by 41.2% in the last quarter. The single analyst providing estimates also noted management optimism, taking the current-year (ending October) EPS estimate up 11.3%.
The 2022 estimate also jumped 13.2% in the last 30 days. This represents EPS growth of 63.7% in the current year and 21.5% the following year on top of revenue growth of 20.1% and 2.6% in the two fiscal years, respectively.
Given its broad revenue base and ongoing strength, the company represents true value. But if you still aren’t convinced, it also pays a dividend that yields 2.69%.
Year-to-Date Price Performance
Image Source: Zacks Investment Research