August 24, 2022, Macy’s, Inc. (NYSE:M) and DICK’S Sporting Goods, Inc. (NYSE:DKS)
In an uncertain retail environment, these two retailers shocked investors with their earnings and sit as the best stocks to buy now.
Is it time to panic yet? The market’s officially on a three-day losing streak, and that summer rally feels long ago. However, even though on Tuesday (August 23, 2022), the Dow dropped -154.02 points (-0.47%), the S&P 500 fell -0.22%, and the Nasdaq fell fractionally, Macy’s, Inc. (NYSE:M) and DICK’S Sporting Goods, Inc. (NYSE:DKS) shocked the market with better-than-expected earnings. Until today, they may not have been the best stocks to buy now. But the more homework we did on these retailers, the more buyable they seemed.
Both companies are positioned better than many of their retail competitors at the moment. Both stocks have performed admirably this summer, despite headwinds and could have even more room to run based on considerable analyst upside and stronger-than-expected Q2 earnings.
Both stocks, despite recent momentum, also offer deep value coupled with robust fundamentals and stable dividends.
This brief overview, however, only teases why M and DKS are the best stocks to buy now. Several other reasons position these retailers above many competitors and many other stocks- regardless of the sector.
Macy’s, Inc. (NYSE:M)
With deep value, outstanding margins, and a recent earnings beat, this prominent retailer could move another 35+%.
The retail climate is uncertain, and Macy’s acknowledged that in its Q2 earnings call.
However, Macy’s has perfect positioning for whatever happens. Following a solid Q2 earnings report, the stock closed over 3.75% higher- despite cautioning investors about customers potentially spending less. It has also seen its stock rocket almost 22% since touching its lows roughly 6 weeks ago (July 14, 2022), yet remains so undervalued that it’s almost comical.
Around since 1830, Macy’s isn’t going anywhere anytime soon. It has 725 department stores and continues bolstering its omnichannel and digital capabilities. Its 3-year Polaris strategy announced in February 2020 to stabilize Macy’s profitability and growth positioning has proven to be successful so far as well.
So although Macy’s could face similar headwinds as retailers like Walmart and Target, it has a more affluent customer base less affected by inflation. It also has strong fundamentals, a stable dividend, and efficient cash flows.
With a 35+% average analyst upside and deep value, M is undoubtedly one of the best stocks to buy now.
After Beating Bottom and Top Line Estimates, M is Prepared for the Worst Yet Expecting the Best
Macy’s was a big market mover yesterday (August 23, 2024) after beating both Q2 EPS and revenue estimates. EPS came in at $1.00, beating analysts’ consensus estimates of $0.86 by $0.14, while revenue came in at $5.60 billion and beat forecasts by roughly $100.00 million.
Furthermore, Macy’s comparable store sales fell less than feared, and CEO Jeff Gennette was sure to highlight Macy’s “Polaris” turnaround plans as making the company “faster and more agile.”
Although Macy’s lowered full-year guidance and was sure to highlight inflation and less spending from less affluent customers, the Company could withstand this better than many other retailers.
After all, strong earnings like the ones it just reported should allow management to continue dividend payments.
The Cheapest Stock You Can Find With the Strongest Margins and Fundamentals
It’s pretty stunning that Macy’s beat its earnings estimates this easily yet trades with some of the cheapest multiples in the market today. Besides trading -31+% below its highs, Macy’s valuation multiples make it clear that this is one of the best stocks to buy now. For instance, not only are Macy’s P/E ratios below 20x. Not only are they below 10x. They’re below 5x, both trailing (3.3x) and forward (4.1x). For good measure, Macy’s also has a 1.6x P/B and a 0.2x trailing and forward P/S.
Macy’s also has a nearly perfect 8 out of 9 Piotroski Score, indicating healthy Liquid Balance Sheets, Profitability, and Operating Efficiency.
Several of its margins lend credence to a high score, like its 54.2% ROCE and 41.1% gross margin.
Its 38.7% free cash flow yield also indicates a phenomenally efficient use of its cash flows. Perhaps that’s why the Company has such a high 63.9% shareholder yield and strong earnings that should allow it to continue its strong 3.21% dividend yield.
An Average Analyst Upside Over 35%
Although analyst activity has been relatively light as of late, many still see considerable upside in the stock. According to TipRanks, 13 Wall Street analysts offered 12-month price targets for Macy’s in the last 3 months. Macy’s has a high price target of $36.00, a low of $13.00 and an average of $26.08. The average price target represents a 35.09% upside from August 23, 2022’s $19.31 closing price.
M’s year-to-date low and high are $15.85 and $28.06, respectively.
DICK’S Sporting Goods, Inc. (NYSE:DKS)
The prominent sporting goods retailer just knocked its earnings out of the park and has recent analyst upgrades showing a 12%-19% upside.
You might be scared of retail stocks at the moment. Many stores have inventory backlogs, and inflation remains the worst tax for consumers.
However, investors clearly feel differently about Dick’s Sporting Goods. The prominent specialty sporting goods retailer, with a footprint of 730 stores, is on fire right now. Overall, since its $63.45 low on May 25, 2022, the stock is up over 75%.
Last week (August 16, 2022), the stock also touched its 2022 high.
Dick’s Sporting Goods is one of the best stocks to buy now for several reasons. Its latest earnings report shattered analyst estimates, and comparable store sales sank way less than expected. The Company also raised its full-year guidance.
But, beyond this, the Company is financially sound, has a surging dividend payment, and a plethora of analyst upgrades calling for this stock to rally another 12%-19%.
Moreover, the stock remains surprisingly undervalued based on many multiples.
An Earnings Beat, Raised Guidance, and Sales That Sank Less Than Expected
Dick’s Sporting Goods Q2 earnings report couldn’t have gone even better.
Its $3.68 EPS beat the consensus estimate of $3.51 by $0.17, and revenue came in at $3.11 billion compared to the consensus estimate of $3.07 billion. Comparable store sales also sank by just 5.1% during the quarter, compared to the projected 6.9%.
To make matters even better, DKS also raised its full-year guidance. For the full year, Dick’s raised its adjusted EPS figures from $9.15-$11.70 to $10.00-$12.00. With the midpoint of the new forecast now $11.00, this also comes ahead of the $10.94 consensus.
It also helps that management has been aggressively buying back shares while Dick’s could see its revenue increase at a 9.2% 5-year CAGR.
The Stock Remains Cheap With Strong Margins
Despite the run that DKS has been on, including touching its year-to-date high a week ago (August 16, 2022), it sits as one of the best stocks to buy now because it trades with a shockingly reasonable valuation. Its multiples indicate that investors still pay a mouth-watering discount for the stock.
Its margins also illustrate why DKS is one of the best stocks to buy now and depict a well-run company.
The Company’s cash flows can also sufficiently cover interest payments, and its 8.7% free cash flow yield is impressive.
However, DKS’s recent dividend growth is a prime selling point for this stock being one of the best stocks to buy now.
While Dick’s 1.73% dividend yield is decent, the pace at which it’s grown and the potential to keep this pace turns heads. Dick’s has increased its dividend for 8 straight years, which is decent enough. But it’s the fact that the dividend has grown at a mind-blowing 99.07% 3-year CAGR that sticks out. Dick’s present and future payout ratios are also extremely low, indicating that this growth pace could likely keep up. DKS’s dividend is currently on track to grow 34.5% at a 23.7% 5-year CAGR.
Recent Analyst Upgrades See DKS Moving Another 12%-19%
Although TipRanks rates the stock a MODERATE BUY, it gives it a limited upside. 17 Wall Street analysts offered 12-month price targets for Dick’s Sporting Goods in the last 3 months, with the high price target at $132.00, the low at $78.00, and the average at $111.38. So, with the stock closing at $111.14 on August 22, 2022, they see the stock may have peaked.
However, you can throw that out the window because the last four price targets DKS received were all upgrades showing a considerable upside.
Between August 17-19, 2022, Telsey Advisory Group and Bank of America boosted their price target to $125.00, while Cowen boosted its price target to $128.00.
Then, on August 23, 2022, CFRA raised its price target to a street-high $132.00.
Do the math. Using August 23, 2022’s $111.14 closing price as the benchmark, a $125.00 price target represents a 12.51% upside, a $128.00 price target represents a 15.21% upside, and a $132.00 price target represents an 18.81% upside.
DKS’s year-to-date low and high are $63.45 and $115.56, respectively.
