8 Stock Picks That Could Get a Child Tax Credit Bump

Aaron's, PROG Holdings

• Market value (Aaron's): $1.0 billion
• Analysts' ratings (Aaron's): 2 Strong Buy, 0 Buy, 7 Hold, 0 Sell, 0 Strong Sell
• Market value (PROG Holdings): $3.0 billion
• Analysts' ratings (PROG Holdings): 6 Strong Buy, 1 Buy, 1 Hold, 0 Sell, 0 Strong Sell

In late 2020, rent-to-own retailer Aaron's (AAN, $28.73) split with PROG Holdings (PRG, $44.91), the parent company of Progressive Holdings, which provides e-commerce, app-based and in-store lease-to-own solutions.

Fast forward a few months, and BofA Securities sees both stocks enjoying a tailwind from the child tax credit.

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"We see both PROG Holdings and Aaron's as well positioned to benefit from the CTC given the lease-to-own industry serves a customer with an average age of 43," say BofA analysts. "We also see the transition of the CTC to a stream of payments (vs. lump sum) as a positive for lease-to-own since households are more likely to use it to initiate or make payments on a lease-to-own purchase rather than buy a product outright."

BofA does mention that the end of expanded unemployment insurance (UI), beginning in September, will offset the benefits of CTC somewhat, however.

Also note that these two stock picks aren't equal in Wall Street's eyes.

"We're especially bullish on Buy-rated PRG given the company's growth potential in virtual lease-to-own," says BofA, which rates the stock a Buy. That's mostly in line with the consensus view, with shares earning a collective Strong Buy rating from the eight analysts covering PROG Holdings.

Aaron's, on the other hand, earns a Neutral (equivalent of Hold) from BofA, and a Hold from the rest of the Street. BofA's analysts give the company a discounted valuation compared to other low-growth retailers "given our view that AAN's store consolidation strategy has high risk if recapture rates are not as high as anticipated."

Burlington Stores

• Market value: $22.0 billion
• Analysts' ratings: 13 Strong Buy, 6 Buy, 5 Hold, 0 Sell, 1 Strong Sell

Burlington Stores (BURL, $330.88) earned a price-target upgrade from Baird analyst Mark Altschwager in late May on the back of better-than-expected quarterly results, which provided more evidence that the company's "Burlington 2.0" strategy – chasing demand and investing in sourcing – was taking hold.

The company blew out earnings expectations, posting $2.59 per share in profits versus a consensus 83-cent estimate. That was helped by a 230-basis-point improvement in gross margins versus expectations that they would be flat. (A basis point is one one-hundredth of a percentage point.)

"Looking ahead, we see significant opportunity for Burlington to drive market share gains and expand margins, supporting a healthy EPS growth algorithm," says Altschwager, who hiked his 12-month price target to $370 per share from $325.

The Baird analyst is also raising his estimates for 2021 adjusted EBIT (earnings before interest and taxes) by roughly 15%. He sees room for upside if favorable merchandise trends continue, "as well as expectations for ongoing pent-up demand, healthy back-to-school, and stimulus tailwinds (child tax credit)."

Dollar General

• Market value: $52.2 billion
• Analysts' ratings: 15 Strong Buy, 7 Buy, 4 Hold, 2 Sell, 0 Strong Sell

Raymond James analyst Bobby Griffin issued a bullish note in May on Dollar General (DG, $220.89), reiterating his Strong Buy call on the stock while upgrading his price target to $235 per share from $220.

Griffin calls DG one of the best long-term "all-weather" investment opportunities in hardline retail.

"Dollar General has the capabilities and real estate growth strategy (multi-year) to continue to gain market share by targeting quick 'fill in' trips for cash-strapped consumers," he says.

Griffin admits that it'll be difficult for Dollar General to lap tough comparisons from 2020, but he adds that there could be additional potential from the child tax credit, as well as stimulus payments and potentially strong customer retention from new shoppers that latched on during the pandemic.

The rest of the Street is collectively in DG's bull camp, too, rating the stock a Buy.

Big Lots

• Market value: $2.1 billion
• Analysts' ratings: 2 Strong Buy, 1 Buy, 5 Hold, 2 Sell, 0 Strong Sell

BofA Securities says retailer Big Lots (BIG, $60.03) is "better positioned than Ollie's (OLLI) to benefit from the enhanced CTC given it serves a younger customer base." The average estimated age at BIG is 42, versus 57 for OLLI, which leads BofA's analysts to estimate the average age of a Big Lots customer's child at 17 versus 32 for Ollie's.

Thus, Big Lots looks better than it did. But it's not necessarily one of the analyst crowd's favorite stock picks.

BofA rates the stock at Underperform (equivalent of Sell), saying "we remain cautious on both stocks given our concern that low-income consumer spending will moderate through the remainder of the year." Among its other worries are high levels of competition in the discount and general merchandise categories – a risk to earnings given Big Lots' low operating margins.

On the flip side, BofA does note the possibility for upside depending on success of cost-cutting programs, as well as the potential for better-than-expected comparable-store sales improvements from remodeled stores and new concepts.

The broader analyst community isn't as bearish, but it's still hesitant, coming down at a consensus Hold. While the CTC might help Big Lots' fortunes, it might be best to look for more fertile ground.

Cheesecake Factory, Brinker International

• Market value (Cheesecake Factory): $2.4 billion
• Analysts' ratings (Cheesecake Factory): 5 Strong Buy, 2 Buy, 9 Hold, 1 Sell, 1 Strong Sell
• Market value (Brinker International): $2.8 billion
• Analysts' ratings (Brinker International): 8 Strong Buy, 5 Buy, 8 Hold, 0 Sell, 0 Strong Sell

Raymond James analyst Brian Vaccaro sees a better value proposition across many full-service restaurant stocks thanks to an industry-wide pullback during the second quarter. He also sees the child tax credit as one of several other drivers of future performance.

"The industry's strong sales recovery that emerged since mid-March sustained through [the second quarter] and seemed to accelerate a bit moving through June," he says. "In addition, we are optimistic that many public chains will echo positive remarks from [Olive Garden parent Darden Restaurants] a few weeks ago as it relates to food inflation and progress towards re-staffing restaurants."

Vaccaro believes strong pent-up demand, excess savings and enhanced child tax credit payments can help lift the group, and that labor conditions will thaw, especially after Labor Day once the enhanced UI benefits expire.

As a result, the Raymond James analyst upgraded stock picks Cheesecake Factory (CAKE, $52.45) and Brinker International (EAT, $61.01) to Outperform (Buy) from Market Perform (Hold) "as we see strong upside to 2Q expectations and attractive valuation entry points, with each down 20%+ from their recent highs.

Vaccaro adds that he expects Brinker "to be in a strong position to resume paying a significant dividend soon while also resuming share repurchases moving into [2022]." Brinker enjoys a consensus analyst Buy rating from the rest of Wall Street.

CAKE earns a consensus Buy, albeit a less enthusiastic one. Vaccaro admits he's a bit more bullish than most about the company's 2021 and 2022 profits. "We are publishing updated EPS estimates of $2.68 [2021]/$3.33 [2022] that are solidly above current consensus of $2.20/$3.12, and believe the company's strong 2Q margins could reinforce investor confidence in the company's post-COVID margin recovery outlook," he says.

Clipper Realty

• Market value: $130.3 million
• Analysts' ratings: 1 Strong Buy, 2 Buy, 0 Hold, 0 Sell, 0 Strong Sell

Clipper Realty (CLPR, $8.11) is a micro-cap real estate investment trust (REIT) that owns, manages, operates and repositions a handful of multifamily residential and commercial properties in New York City.

REITs broadly took a hit in 2020, but especially those dealing in properties concentrated in big cities after offices sent their workforces home. Indeed, Clipper Realty lost roughly two-third of its value by 2020's bear-market nadir, and even after recovering somewhat, it finished down 33%.

2021 has been a little kinder, with shares up 15% year-to-date, though that still trails the real estate sector's 26% improvement. Fortunately for new money, CLPR's declines have translated into an elevated dividend yield of 4.7%.

And Raymond James' Travis Workman sees plenty of reason for optimism in share prices.

"Following conversations with management last week, we are maintaining our Outperform rating and $9 target on CLPR shares while refreshing our estimates," he says. "As New York City comes back to life post-pandemic, we are increasingly encouraged the worst is over for CLPR's pricing and occupancy. We expect leasing activity to continue accelerating this summer, as NYC fully gears up for a return-to-office movement later this fall."

Workman says upcoming child tax credit benefits should "further stabilize rent collection," and he notes that on the whole, multifamily fundamentals are sharply improving across the city.

Unsurprisingly given its size, Clipper has a small analyst following of just three pros. But they all list CLPR among their recommended stock picks, rating it either Buy or Strong Buy.