5 Best Retail Stocks to Buy in October 2021

Retail stocks are a bet on US consumers’ massive spending appetite. Thanks to the advent of e-commerce, retail now includes both brick-and-mortar retail and e-commerce companies. Almost all brick-and-mortar companies are now embracing online sales.

Retail stocks have generally been quite popular among retail investors. Here are the five best retail stocks that you can buy in October 2021.

1. Costco (NYSE: COST)

Costco stock is up around 18% in 2021. While many believe that the stock’s valuations appear stretched, it has continued to shine. Costco released its fiscal fourth-quarter 2021 earnings last month. The discount retailer reported revenues of $62.68 billion which were 17% higher than the corresponding period last year and came in ahead of estimates. The company’s profits were also ahead of estimates.

Of the 21 analysts polled by TipRanks, 15 rate COST stock as a buy while the remaining six have a sell rating. Its average target price of $484.8 is a premium of 8.1%. Its highest and lowest target prices are $525 and $385 respectively.

Wall Street analysts find Costco as a good retail stock

After Costco’s earnings last month, several analysts raised their target price on the retail stock. Citigroup raised its target price from $460 to $495 while maintaining its neutral rating. Credit Suisse also maintained its neutral rating on the stock while increasing the target price from $400 to $490.

Tigress Financial analyst Ivan Feinseth also reiterated his buy rating and assigned a $520 target price on Costco stock. He cited the company’s loyal customer base and strong supply chain management to support the thesis. Meanwhile, Costco has placed purchase limits on some grocery items amid the logistics issues that have crippled the supply chains in the US.

With an NTM (next-12 months) PE multiple of 37.2x, Costco does not appear too cheap. However, if you are looking at a quality retail stock to buy for the long term, COST looks like a good bet.

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2. Best Buy (NYSE: BBY)

Electronics retailer Best Buy looks another good retail stock to buy in October. The stock is up only about 5% in 2021, but Piper Sandler sees a massive upside in the stock. Last month, the brokerage issued a bullish note on BBY and raised its target price to $150.

Piper Sandler finds BBY as a top retail stock to buy

“BBY is quickly becoming one of our top ideas under coverage,” said Piper Sandler analysts in their note as they termed the Best Buy Total Tech membership program “one of the most intriguing initiatives BBY has launched in 5+ years.”

The analysts added, “Ultimately, we expect the membership program to drive incremental purchase activity by members.” The brokerage also cited BBY’s lower comparative valuations to support their bullish argument.

BBY looks like an attractively valued retail stock

BBY stock currently trades at an NTM PE of 12.1x. In comparison, the multiple has averaged 13.9x and 12.5x over the last five and ten years respectively. The valuation discount of BBY stock, both when looking at time-series data, as well as that of other retail stocks, looks surprising. Notably, while most of the retail stocks are trading at a premium to their long-term valuation multiples, BBY is trading at a discount. The valuation discount looks unwarranted and BBY stock looks like a rerating candidate.

The stock’s average target price of $132.91 implies an upside of 26% over these prices and it has received seven buys, four hold, and one sell rating. The stock pays a healthy dividend yield of 2.66% which is almost twice the S&P 500’s dividend yield.

Overall, BBY stock looks like an attractive retail stock to buy especially if you are looking at a stock with a high dividend yield.

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3. Dollar Tree (NYSE: DLTR)

Dollar Tree stock rose sharply last week after the company announced that it would add more goods above $1 to its shelves. It also increased the share buyback program to $2.5 billion which helped lift sentiments and triggered a rally in the stock. While the company is known for selling products below $1, it has been experimenting with adding higher-priced products to its portfolio.

We recognize the need to make adjustments in the current economic environment,” said Dollar Tree CEO Michael Witynski. His comments should be seen in the light of rising cost inflation in the US, especially for retail companies. The decision to sell more products above $1 would help the company protect and also expand its margins amid the cost pressures.

DLTR stock valuation

Sounding an optimistic note on the decision, Witynski said, “These price points will bring a meaningful assortment that over time will have a positive impact on our performance.” Dollar Tree trades at an NTM PE of 17.9x which is slightly higher than the five-year average. However, the ongoing turnaround at Family Tree stores, massive buyback, and the decision to sell more higher-priced goods would help the company in the medium term.

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4. Amazon (NYSE: AMZN)

Amazon stock is up only about 3% this year and is the worst-performing FAANG stock. The company missed the revenue estimates in the second quarter and provided weak third-quarter guidance. The second-quarter earnings release only added to the weakness in AMZN stock. Notably, Amazon’s chairman and founder Jeff Bezos has lost its position as the world’s richest person to rival billionaire Elon Musk amid the underperformance of AMZN stock.

What makes AMZN a good retail stock to buy?

Meanwhile, as the world’s largest e-commerce company, AMZN is a good way to play the digitization of the e-commerce industry. The company is a proxy play on the retail industry which has been moving from brick-and-mortar to e-commerce. As the share of e-commerce sales in total retail sales continues to expand, AMZN is one retail stock that should be part of your core portfolio.

To be sure, the stock has underperformed in 2021 and has also provided soft guidance for the back half of the year. That said, the company is facing YoY comps this year as the lockdowns led to a sharp increase in sales last year. Next year, Amazon’s sales growth could surprise on the upside as it won’t face tougher comp comparison as it is facing this year.

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5. Kroger (NYSE: KR)

Berkshire Hathaway, whose chairman Warren Buffett is known for his value investing, holds an 8.3% stake in Kroger. The Oracle of Omaha, as Buffett is known, first bought KR stock in the fourth quarter of 2019 and has since then increased the stake. Last month, Kroger released its fiscal second-quarter 2021 results. While its identical sales without fuel fell 0.8%, they increased 14% on a two-year basis. The company also increased its fiscal year 2021 guidance after the impressive results.

Kroger is among the rare retail stocks in Berkshire’s portfolio

Buffett hasn’t been a great fan of retail stocks but Kroger is among those names where he seems bullish even as he hasn’t been able to identify good buying opportunities in these markets. KR stock is up almost 22% for the year. However, the stock has come off its recent highs and currently trades at a discount of 18.5% from its 52-week highs.

Meanwhile, the fall in KR stock looks like a good buying opportunity. The company has a strong franchise and its e-commerce sales have also been rising sharply. The company has raised its guidance twice this fiscal year.

The valuations also appear reasonable after the fall and KR trades at an NTM PE of 12.1x. Consensus estimates call for an upside of 10% from these levels in Kroger stock. If you want to bet on a retail stock that even Buffett loves, Kroger would fit the bill.

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