7 Retail Stocks That Will Win the Holiday Season

With macro headwinds forcing dramatic fluctuations in the market and the global economy, it’s no wonder that some of the top retail stocks to buy now suffered. Indeed, whether we’re talking about more inflation or the possible rise of deflation, consumers these days have a greater incentive to zip up their wallets.

At the same time, ignoring retail stocks altogether could be a big mistake. For one thing, people need to purchase various goods. Most of these will cover items from consumer staples but a few discretionary acquisitions will also make up the rounds. Therefore, retail stocks that ease the pain for shoppers should be high on your list. In addition, a few speculative ideas may be able to shock some investors this holiday season. So, if you’re ready to take some risks, below are retail stocks to buy that can beat the winter freeze.

Retail Stocks to Buy: Costco (COST)

Though retail stocks have a poor reputation right now in part because of poor consumer sentiment, Costco (NASDAQ:COST) arguably provides strong confidence. Sure, COST is in the red for the year, losing almost 6% on a year-to-date basis. However, the benchmark S&P 500 still stares at a double-digit loss during the same period.

Fundamentally, Costco offers resilience among retail stocks because its business does well no matter what curveballs the economy may throw. And that’s due to the company’s core customer base, which features an income level that stands higher than average. If you’re interested in the specific demographic statistics, you can check out my in-depth analysis of COST stock here. But again, it just comes down to Costco shoppers being relatively wealthy. If you want another reason to consider COST, you can bank on its balance sheet. Currently, the company features an Altman Z-Score of 7.56, reflecting very low bankruptcy risk.

Retail Stocks to Buy: Five Below (FIVE)

Recently, I’ve been harping on Five Below (NASDAQ:FIVE) simply because the company doesn’t get all the love it deserves (yet). A discount retailer, Five Below should attract attention just for that fact alone. After all, many experts believe we’re headed for a recession. Still, FIVE slipped over 22% of equity value since the beginning of this year.

Nevertheless, it appears that recently, investors are catching onto FIVE stock. In the trailing half-year period, FIVE gained over 33% of market value, representing one of the recently top-performing retail stocks. Therefore, prospective investors should consider jumping on board perhaps sooner rather than later.

Based on Gurufocus.com’s proprietary indicator, FIVE trades noticeably below what its fair market fundamentals imply. As well, the company carries a three-year revenue growth rate of 22.2%, beating out over 84% of its peers. Finally, it also has a return on equity of nearly 22%, reflecting a very high-quality business. Therefore, it’s one of the retail stocks worth closer inspection.

Retail Stocks to Buy: Ollie’s Bargain Outlet (OLLI)

Another discount retailer, Ollie’s Bargain Outlet (NASDAQ:OLLI) brings plenty of intrigue to the table. Its main appeal is that the company offers brand-name merchandise up to 70% off the regular retail price. And we’re not just talking about undesirable products, such as imitation Coke. Instead, Ollie’s delivers books, clothes, and even heaters for the incoming winter season.

Because of its broader relevancies, OLLI is an oddity among retail stocks. Rather than being underwater, shares are up nearly 16% YTD. Recently, OLLI gained substantial momentum, zooming up over 17% in the trailing five days. With consumers looking for whatever bargains they can get their hands on, the company offers a much-needed service.

Per Gurufocus.com, OLLI trades below what the investment resource defines as its fair market value. In addition, the company offers strong income statement-related metrics. Both its three-year revenue growth rate and net margin rank better than at least 81% of its competitors.

Dollar General (DG)

One of the classic retail stocks to buy when bearish forces dominate the market, Dollar General (NYSE:DG) is a chain of variety stores. As of April 2022, the company owns 18,216 locations in the continental U.S. Thanks to its relevance during downtimes, DG stock managed to climb into positive territory for the year, up nearly 9%.

In addition, DG gained momentum in recent sessions, moving up over 2% in the trailing month. Fundamentally, Dollar General should benefit from the trade-down effect if the aforementioned bearish forces convert into a full-blown recession. In other words, as households’ spending power diminishes, they’ll choose to purchase goods at lower-cost platforms. Frankly, it doesn’t get much lower than Dollar General.

Another reason to consider DG as one of the retail stocks to buy centers on the financials. In particular, the company features excellent growth and profit margins that rank within the underlying sector’s top echelon. As well, its return on equity of nearly 38% reflects an extremely high-quality business.

Dollarama (DLMAF)

In most cases, it’s best to invest in companies that you know reasonably well. However, going abroad can bring you deals that may fly under the radar, for now, only to pop higher later. That may be the case with Dollarama (OTCMKTS:DLMAF). On the surface, Dollarama appears very similar to other discount-oriented retail stocks to buy. However, its operations and presence in the Canadian market could be attractive.

For one thing, DLMAF has been a strong performer compared to other retail stocks. Since the beginning of the year, DLMAF gained slightly over 10%. Moreover, Dollarama appears to have the Canadian market locked down. Its three-year revenue growth rate stands at 9.6%, better than 76% of the competition. Also, its book growth rate during the same period is 39.3%, above nearly 97% of the industry.

Finally, Dollarama also represents a profitability machine. Its operating and net margins stand at 22.7% and 16%, both stats ranked within the top 5% of the industry.

Target (TGT)

For the next two retail stocks, I’m going to dive into the speculative realm, beginning with Target (NYSE:TGT). One of the most popular big-box retailers in the country, Target usually offers a solid bet for investors. Unfortunately, the new normal did a number on the business, particularly regarding the bloated inventory problem. Further, with consumer sentiment weakening, circumstances don’t look swell for Target.

If that wasn’t bad enough, management also issued warnings about a possible soft holiday quarter. So, why bother dealing with TGT? Frankly, non-risk takers should stay away. However, there’s also a case to be made that because Target plunged so badly this year – especially against its key rivals – that TGT may flourish on any encouraging data.

On the other hand, those companies that are currently performing well may suffer if the news isn’t robust enough to keep investors’ interest alive.

Generally speaking, Target offers a decent balance sheet and excellent growth and profitability. Its forward PE ratio of 16.3 times isn’t wonderful but rather middling. Nevertheless, it’s much more attractive than its key rival in this regard.

CarMax (KMX)

No, I’m not trying to pull a fast one on you. Compared to all other retail stocks on this list, CarMax (NYSE:KMX) represents the riskiest. Since the start of the year, KMX slipped almost 48% in equity value. Moreover, most of this pain came recently. In the trailing six months, KMX dropped nearly 31% in value. It’s not hard to see why.

With the Federal Reserve committed to tackling inflation, the benchmark interest rate spiked dramatically higher. Of course, this translates to higher borrowing costs, imposing affordability challenges for consumers already struggling with other headwinds. And with the new normal’s prior car-buying boom, it was perhaps inevitable that the market would slow.

Here’s the thing. While YouTube finance luminaries will disseminate hackneyed advice about cars not being investments, in many parts of the country, they represent a necessity. Further, with people already holding onto their rides for longer than they should, CarMax’s demand profile will eventually blossom. Knowing when that will be is the ultimate question.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.