Deutsche Bank Has 3 Consumer Favorite Top Pick Retail Stocks for 2016

By Lee Jackson Updated Jan 13, 1:42PM EST · Published Feb 3, 10:50AM EST

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Deutsche Bank Has 3 Consumer Favorite Top Pick Retail Stocks for 2016 — © courtesy of J.C. Penney Co. Inc.

Despite the fact that some on Wall Street discount the effect that lower gasoline prices have on the U.S. consumer, the bottom line is we are experiencing one of the greatest wealth transfers ever posted as the discount at the pump flows straight into consumer’s wallets. While some does go to pay down debt and improve savings, much goes right back into the economy — to the top retailers.

A new Deutsche Bank research report is very bullish on three top companies in the retail space, and while the analysts agree that the consumer is in much better shape, they remain very selective due to current higher than normal valuations. Their best ideas are proven winners in the sector, and each one is outperforming its peers on the top line. All are rated Buy at Deutsche Bank.

Costco

This has become the ultimate destination for the American consumer regardless of the economy. Costco Wholesale Corp. (NASDAQ: COST) has a unique business model. It operates membership warehouses and the company buys the majority of its merchandise directly from manufacturers, essentially cutting out the middleman. Costco sells in bulk but also at a lower price, thus fueling its rapid growth. With consumers having more free cash to spend as gasoline prices have dropped, this major retailer may continue to see large revenue gains.

Costco remains one of the few conventional retailers with metrics like store traffic, market share gains and a validated model that could bode well in international growth and expansion. The company is largely unharmed by e-commerce and continues to add stores in strategically mapped out locations.
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While the stock rampaged last year, some of the momentum has reversed this year. The Deutsche Bank team loves the revenue growth drivers like organic and fresh foods. They also cite higher gasoline gallon purchases as a positive. The analysts also see the transition to Visa away from American Express as a distinct positive. With the stock down over 10% this year, the entry point is very solid here.

Costco investors receive a 1.07% dividend. The Deutsche Bank price target for the stock is $198, and the Thomson/First Call consensus target is $171.57. Shares closed Tuesday at 148.50 apiece.
Foot Locker

This athletic shoe retailer had a very solid holiday selling season. Foot Locker Inc. (NYSE: FL) is a specialty athletic retailer that operates 3,419 stores in 23 countries in North America, Europe, Australia and New Zealand. It operates Foot Locker, Footaction, Lady Foot Locker, Kids Foot Locker, Champs Sports, SIX:02, Runners Point and Sidestep retail stores, as well as direct-to-customer channels, including Eastbay.com, FootLocker.com and SIX02.com.

Many Wall Street analysts feel that consumers are easily bearing price increases from the top companies like Nike and Under Armour. The conventional wisdom is that currently athletic apparel and footwear companies are continuing to see higher gross margins and return-on-invested-capital, which is a source of multiple expansion. That should be just the ticket to get a further lift in the stock price. The company reported in its third-quarter earnings report that comparable sales jumped more than 8%, beating nearly every other retailer.

Foot Locker investors are paid a 1.45% dividend. The Deutsche Bank price target is posted at $81, and the consensus target is $76.17. The stock closed Tuesday at $69.14.

J.C. Penney

This companies offered shoppers among the highest percentage discounts during the holiday season. J.C. Penney Co. Inc. (NYSE: JCP), one of the nation’s largest apparel and home furnishing retailers, is dedicated to fitting the diversity of America with unparalleled style, quality and value. Across approximately 1,020 stores and online, customers can discover a broad assortment of national, private and exclusive brands to fit all shapes, sizes, occasions and budgets.

The company made big inventory strides during the holiday shopping season so as not to run out of the top-selling items, a problem that was severe in 2014. Despite the struggles over the past five years, which included the dreadful hiring of Ron Johnson from Apple as chief executive, the company remains a top shopping destination for many Americans that grew up with the brand.

The Deutsche Bank team points to solid market share momentum, the ability to expand margins and an upcoming balance sheet catalyst as reasons to buy the stock now. They conceded that while competition and discounting from peers is stiff, the company showed during the fourth quarter it is up to the challenge.

The $12 Deutsche Bank price target is higher than the consensus target of $9.78. J.C. Penney stock closed the day on Tuesday at $7.46 per share.
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The theme of the improving consumer is a strong one, and the careful selection of stocks at higher valuations is the smart one. With a price volatile market, careful selection is key, and all of these make sense for more aggressive growth accounts.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.