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All Contents © 2019The Kiplinger Washington Editors
By Dana Blankenhorn
| November 16, 2018
Everyone’s aware of the seasonal pattern around the holidays. As Thanksgiving and Black Friday near, retailers ramp up their discounts until going full-bore for a roughly monthlong bargain bonanza. But there’s an investment thesis, too: Companies whose sales and profits peak around Christmas tend to make good stocks to buy for a short-term bump.
It doesn’t always work with every seasonal stock, of course. Some companies have bad quarters. And in broad-market corrections and bear markets, almost everything falls – even quality firms that are performing well.
But if a normal seasonal pattern holds, several companies – that have exhibited this pattern of rising and falling in previous years – should do quite well. They’re not just retail stocks either. Many other types of associated investments get the same type of multi-month boost.
Here are seven stocks to buy for a 2018 holiday season pop, though many of them you may want to keep well into the new year.
Data is as of Nov. 15, 2018.
Market value: $59.5 billion
FedEx (FDX, $227.81), the package delivery company formerly called Federal Express, often does well during the Christmas quarter, and 2017 was no exception. Shares gained more than 12% from early October through late December, though it did give back nearly all those gains in the March quarter, falling 8%.
The stock looks like a bargain at the moment, trading at just 11.2 times analysts’ estimates for next year’s profits. The dividend, at 1.1%, doesn’t look like what you’d expect out of a value play, but you’re getting outstanding payout growth – the 65-cent quarterly dividend has jumped 160% since the beginning of 2016.
But there’s more than a value proposition; FedEx keeps growing at a decent rate. Last year’s revenues of $65 billion should hit $71.3 billion this year, then $75.2 billion next, analysts say. Speaking of the pros, 21 of the 28 analysts following the stock give it buy-equivalent ratings, and none have it as a sell.
Nancy Perez, managing director and senior portfolio manager at Boston Private, a Boston-based wealth management company, thinks e-commerce should translate into another healthy season for FedEx. She sees revenue growing by double digits as it continues to gain traction from the strong U.S. economy. And it’s one of just a few companies that actually benefit from Amazon.com (AMZN) rather than suffer from it – at least for now.
Market value: $775.2 billion
Speaking of Amazon.com (AMZN, $1,619.44), the e-commerce giant is up more than 35% year-to-date. That sounds great, but anyone following the stock would know that it was so much better just a few months ago.
A broader collapse in tech stocks has hit Amazon particularly hard. AMZN shares are in bear-market territory, having fallen more than 20% off its early September peak. The company didn’t help itself in late October, when it announced a robust 29% jump in third-quarter revenues that nonetheless failed to beat Wall Street expectations.
Still, Amazon could be in position for a holiday rebound.
AMZN shares jumped 22% during the 2017 Christmas quarter, and while shares weakened to start 2018, they took off again after the company reported terrific results in early February.
Boston Private’s Perez says Amazon should do well again in the 2018 holiday season, citing a National Retail Federation forecast that overall Christmas-season sales will rise 5% from last year.
Edward Jones consumer analyst Brian Yarbrough expects Amazon to continue gaining market share against brick-and-mortar retailers this Christmas season, as convenience becomes ever more important and consumers continue to evade crowds. He did, however, have it as merely a hold based on its value in early October, as the correction in tech stocks began.
Market value: $921.6 billion
Apple (AAPL, $191.41) is another tech stock that has fallen into bear-market territory, if only even briefly, with a quick 20% drop between its Oct. 3 high and its Nov. 14 low. While it made headlines as the first U.S. company to reach $1 trillion in market capitalization earlier this year, it has since ceded that mark, though it remains the most valuable company by market value.
Apple has struggled mightily since its most recent earnings report, in which it not only reported flat iPhone and Mac unit sales, but said it would no longer report unit sales – what many analysts took as a sign that Apple expects gadget sales to be underwhelming going forward.
Boston Private’s Perez points out Apple still has an attractive valuation compared to other tech stocks. AAPL trades at a forward P/E of merely 13 despite analyst predictions for double-digit profit growth next year and a dividend that, while modest at 1.5%, is rapidly growing. Moreover, there’s still a bull case – namely, Perez believes, Apple’s efforts to push more users to spend on its Services division offerings such as iCloud and Apple Music.
Last year, Apple rose by about 10% during the holiday season. Considering how low expectations appear to be for Apple’s unit sales, perhaps a similar-sized rebound could be in the cards for the rest of the year.
Market value: $18.3 billion
Best Buy (BBY, $67.78) has stunned a lot of market experts over the past few years by delivering strong returns in the face of Amazon’s business advances. That included a 20% jump during the holiday-season months.
BBY has cooled off a bit this year, however, pacing for slight losses with about six weeks left in the year. Rumors of poor Christmas sales dragged the stock in February, then shares fell further once the bad news was confirmed in March.
But John Burke – CEO of Burke Financial Strategies in Iselin, New Jersey – still likes Best Buy. “Best Buy beat expectations with their August earnings report, with strong sales in electronics, mobile phones and entertainment,” he writes, growing e-commerce by 10% and in-store revenues by 5%.”
And if analysts’ projections hold, Best Buy should remain one of the best turnaround stories in the market. The pros still believe the retailer will post modest revenue gains this year and next (versus many other brick-and-mortar operators that continue to see sales slide), and they expect 15% profit growth this year followed by a 7% climb in 2019.
As for a holiday boost this year? Best Buy should benefit from a broader uptick in consumer spending, but it’s also positioning itself to gain customers from deceased Toys R Us by bolstering its toy selection for the 2018 holiday season.
Market value: $9.9 billion
Gap (GPS, $26.22) stock often can be a big Christmas tease. The stock rises as reports grow of a great holiday season … then falls back when more modest numbers are released. Last year, for instance, GPS rose 18% during the fourth quarter, but fell back by about 6% during the March quarter.
Gap admittedly isn’t as strong a long-term play as the rest of the stocks on this list. The Gap brand specifically is struggling. Last quarter, the company reported its seventh consecutive quarter of growing same-store sales, yet the Gap brand specifically reported a 5% decline in comps. Analysts worry that heavy discounts are dissuading customers from ever paying full price, and crimping margins.
There are a few reasons to buy. GPS shares have been knocked into deep-value territory of less than 10 times future earnings estimates, and patient shareholders are being paid to wait via a 3.5% dividend.
Admittedly, even if the Gap has a boffo fourth quarter, it will take more than one strong report to convince investors that there’s a real long-term buy-and-play thesis here. But even whispers of a good Q4 could be enough to propel battered-and-bruised GPS shares considerably higher.
Put another way: Gap may be a good short-term play for more speculative investors.
Market value: $29.6 billion
Southwest Airlines (LUV, $53.23) is the most domestic focused of major U.S. airlines, and that – as well as an emphasis on top-tier customer service – has helped the stock nearly triple over the past five years.
It hasn’t been smooth sailing the whole way. In fact, LUV had more than tripled as of just a month ago, but the stock turned tail fast in late October despite a very strong quarterly earnings report. Southwest delivered record third-quarter earnings per share of $1.08, operating revenues grew 5.1% year-over-year and revenue per available seat mile (an important airline operating metric) improved by 1.2% YoY. All these results came in the face of higher fuel costs.
Investors still responded by selling in droves, and shares remain off nearly 20% for the year-to-date.
A strong Christmas season could turn the tide. LUV shares jumped nearly 12% during the holiday quarterly of 2017, and airline ticket prices are expected to jump sharply for the 2018 holiday season. Meanwhile, investors who decide to stick around for longer than just a few months should be rewarded with a quickly growing payout that has more than doubled since 2016. In fact, LUV represents one of the fastest-growing dividends in Warren Buffett’s Berkshire Hathaway (BRK.B) portfolio.
Market value: $285.3 billion
Walmart (WMT, $99.54) has lost a little bit of steam of late amid Vermont Sen. Bernie Sanders’ push to force the company to raise its minimum wage to $15 across the board. But the company remains a retailing juggernaut whose projected $515.7 billion in current-fiscal-year sales is more than double the $232.3 billion that analysts expect Amazon.com to earn this year.
It also spread plenty of holiday cheer to investors in 2017, rocketing 26% during the holiday quarter alone.
Edward Jones’ Yarbrough expects Walmart to excel this Christmas, too. He likes their efforts in e-commerce, which has been led by the 2016 purchase of Jet.com, but also include other smaller e-commerce pickups over the past couple years, as well as the addition of grocery pickups, and the 2018 addition of a 77% stake in Flipkart – the Indian answer to Amazon.com.
Burke, of Burke Financial Strategies, notes that Walmart’s margins are better than Amazon, and sees Amazon’s purchase of Whole Food Market last year as an admission that Walmart’s “combination of bricks and e-commerce” is the right strategy.
Perez sees Walmart setting up well for Christmas, too, with 57% of online shoppers expecting to visit its website over the holidays, and 70% of women age 40-54 planning to shop at the store.
“Walmart’s fulfillment investment has been effective,” she adds.
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