Buy This, Not That: Are These Stocks Dressed for Success?

Shah Gilani|June 26, 2024

From high-end boutiques to discount chains, the retail sector is draped in opportunity and risk.

This week, we’re diving into the closets of America’s biggest clothing retailers.

We’ve got strong dividend yields, short squeezes, and a meme stock in the making.

One stock’s been flat for five years, while another’s rocketed from $8 to $24 in a matter of months.

Try these stocks on for size and decide which ones are the right fit for your portfolio.

Click on the video below to uncover the BUYs and NOTs of retail.

TRANSCRIPT

Hey, everybody. Shah Gilani here with your weekly BTNT, as in Buy This, Not That.

Thank you all for sending in a bunch of names. A lot of you wanted to see what I thought about – whether they’re BUYs or NOTs – the retail shops, mostly clothing. So I have a little list for you here.

Let’s take it off the top with the most-asked-about stock and company, Macy’s (M).

Let me just say this about Macy’s… If you looked at a five-year chart, you would scratch your head and think, “a lot of nothing.” If you looked at the one-year chart, you might be think, “oh, it looks like it’s had an okay year,” but at the end of that one-year period, it’s really a lot of nothing.

So when I think of Macy’s, I think of a lot of nothing.

Great stores, great merchandise. But as far as the stock, a lot of nothing.

It’s trading around $19 and change right now. Five years ago, it was at $22. That’s what I mean.

It’s trading at $19.50 – you got nothing going for five years. You had some bumps, ups and downs, but what’s the point? There are better places to put your capital. It was at $16 at the start of the year and got up to $19. But it also got down to $10 before it moved back up to $19.

So you got volatility in here too.

It’s just not the kind of stock that I think on the retail side of things, clothing is going to be a grand slam.

Not Macy’s, people. It’s been struggling for some time.

Its quarterly revenue growth year over year is down by almost 4%. Its quarterly earnings growth year over year is down something like 60%.

So if it looks cheap, it’s cheap for a reason. To me, it’s got a ton of debt, $6 billion, thin cash flow. It’s not worth it, people. It’s a NOT.

Do not buy Macy’s. Much better places to put your capital.

Next up, got a lot of questions about Nordstrom (JWN).

Now, Nordstrom, a high end retailer, has been struggling for years. Stock kind of looks like Macy’s. It’s kind of flat, really, over time. Only worse, really.

It’s got $14.58 billion in annual revenue. Profit margin’s 2.02%.

Debt, $4.24 billion. Now, all these companies have a lot of debt, but the problem with Norsdstrom is the balance sheet is kind of like a whack-a-mole game. As far as the cash flow, free cash flow and leverage, it’s all over the place. It’s not a comfortable balance sheet in general to be supportive of that kind of debt while trying to grow the company.

I don’t know what they’re going to do.

Yes, they pay a dividend, and they actually can afford it.

By the way, Macy’s pays a dividend, but they can’t afford it. So that dividend is going to have to get cut.

But Nordstrom pays a dividend. It’s not robust at 5.53%, but at least they can afford it.

The only thing that I can say that I like about Nordstrom is its stock is 15.76% short of float. So of the floating shares, 15% – almost 16% – of the floating shares have been shorted. That means it’s possible they can get pops now and then.

Other than that, I’d say NOT.

Next up, Kohl’s (KSS). With Kohl’s, it’s kind of like deja vu all over again when it comes to the chart… whether it’s the five-year or the one-year.

Sloppy.

The stock is trading around $24 now. Five years ago, it was at $50. It went down to $25, then went up to $65, then went down to $18. It’s at $24 now. So it’s all over the place.

It has to get above $30 from here for me to think that this thing could then make another run at $50, which would be a nice gain.

But I tell you what, I like it for a couple of reasons.

First of all, the dividend yield is 8.16%. Now, that’s nothing to sneeze at. And, yes, they can afford to pay that dividend, that 8.16% dividend yield.

I like that.

The dividend comes with an 80% payout ratio. That’s 80% of their net income available to common shareholders that goes to pay the dividend. So they have extra room in there. It’s not like they’re at 100%, 98%. They’re at an 80% payout ratio.

That’s a nice dividend yield. In this day and age, that’s a pretty darn good dividend yield.

There’s something else I like about Kohl’s.

Shares are 46% short of float.

Wow.

Can you say… “meme stock in the making”?

Forty-six percent short of float. That’s a pretty big short position collectively on Kohl’s.

Yes, the earnings recently were a quarterly loss. Yes, they missed their revenue estimates and earnings per share estimates, and they lowered their forecast for the full year.

So the stock got hit. And, by the way, it was a surprise loss.

But I like the stock. I like it because on a speculative basis, trading at $24 and change, maybe you go out and look for some out-of-the-money calls, maybe even up to $30. And you go far enough out to catch maybe the next earnings period or the one after that, because they’re going to be pretty cheap with the stock beaten up.

Maybe you make a play for a big short-covering rally. Maybe you make a play for the earnings beat, and then you have a short-covering rally. And then you get above $30, and you maybe score on your $30 calls or something like that. I like thinking about how I can play calls from the long side, with a smart risk/reward play.

Now, of course, it would be using a call spread, more than likely.

So, I like Kohl’s. Would I buy it for the long term? Yes. I’d be protective on my downside, but, yes, I would buy it for the long term, because with that yield, it pays me for a while, and as long as it’s not dipping down too much and I’m just not losing too much relative to the dividend I’m going to get then I would actually consider buying Kohl’s. But I prefer it on a speculative basis. It’s just less risky, and that’s the way I like to play.

Next up, the Gap (GPS). It’s trading at $24 and change. This has had a heck of a year. The 52-week chart looks great.

The Gap was down to $8. Now it’s at $24. That’s a nice move. It got up to $30 and recently back down to $24, about $24.71 today.

I say wow to that. It crushed its earnings. The stock has been very good on that account.

And there’s a consistent short of float position there. About 17% of the floating shares have been shorted. Usually it’s in a range between 10% and 20%. So you’re going to get pops on Gap because of that consistently levered up short positioning in Gap.

They beat on earnings. If they consistently beat on earnings, and hopefully they do, the stock can continue to pop higher. I think Gap is pretty decent here at $24.71.

It’s not my favorite stock, but if you own it, I wouldn’t sell it. Is it a BUY? Yes. It’s a speculative BUY here.

Sales are $15 billion. Profit margin is 4.52%. Pretty nice. Yes, it has debt – $5.5 billion-plus – but it’s got really good cash flow, really good leverage, good free cash flow, good operating cash flow, and a good cash position. So the balance sheet is not a problem for me.

I like it, but I’m scared up here because it had such a run already.

It’s trading at $24 and change. If you want to take a shot at it, let’s see if you can get it down to $20. Then it’s worth this little shot, tight stop on there, and give Gap a go because Gap’s been doing well.

Last but not least, Ross Stores (ROST). It makes $4.65 billion in annual revenue, with a 9.6% profit margin.

Net income available to common shareholders is $2 billion. Nothing to sneeze at. This are pretty darn good numbers. Yes, they have debt – who doesn’t? – at $5.83 billion. But cash on hand is $4.65 billion.

Operating cash flow is $2.47 billion annually.

Quarterly revenue growth year over year is up 8.1%. Quarterly earnings growth year over year is up 31%.

I like Ross. Their May earnings were good. They beat pretty much across the board, and they raised their full year guidance.

The thing I like most about their earnings is that their profit margin increased 205 basis points.

Color me impressed. I like Ross. They’re expensive at $148 a share. Admittedly expensive, but I do like Ross.

They’re worth a shot, again, because they’re expensive and I think they can go higher. I’m not going to say go load up the boat, but if you want to put some money into Ross, let’s see what it does. Again, it’s expensive, so maybe some of you want to play some options, maybe a call spread on it in the future, because I think for the year, if they continue to do what they’re doing, I think their stock can continue higher.

Let’s just give some perspective here… the 52-week intraday high $151.12. It’s trading at $148 and change right now. So I think you can get back out there, take out that old high, which was just back in February, and go higher. But, again, it’s a little expensive, so you’re risking a little bit.

In a perfect world, it might come back down to its 200-day, and you could pick it up somewhere near the 200-day, which is at $133. That would be ideal to get down there. I don’t know if it’s going to come down to $133. I would prefer to buy it there.

I like a little cushion, but, I think Ross Stores is something worth looking at.

It’s a BUY. Just a matter of the price. If it comes down into the $130s, it’s definitely a BUY there. But if you want to buy it here, I think you can go higher too. Just don’t overload the boat with Ross.

That’s it for this week. I’ll catch you guys next week. Cheers.