If you live in the upper Midwest, you don’t need anybody to tell you how miserable the spring was. According to the National Oceanic and Atmospheric Administration (NOAA), the United States had the rainiest April quarter in at least the past 20 years. So not only did horrific flooding damage crops and farms, but many of the top stocks that count on good spring weather for sales going into summer got hit hard.
A new Jefferies research report analyzed the NOAA national weather data by retail fiscal quarters to get an idea how stocks trade around optimal and suboptimal weather conditions, and the analyst discovered that some of the companies that suffered during the spring could bounce back nicely if the weather this summer holds up.
The report noted this:
Those who enjoy mudding should have enjoyed April but that activity is fairly niche. For those without 40 inch tires, and especially for those who own retail stocks, April weather was unwelcome. A look at performance data suggests that much wetter than normal Spring seasons tend to drive relative underperformance for the SPDR S&P Retail ETF (NYSE: XRT) in May but subsequent outperformance.
Eight Buy-rated Stocks were highlighted in the report, but the following four appear to have the biggest upside potential.
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Advance Auto Parts
This top stock was hit hard this spring and now offers a great entry point. Advance Auto Parts Inc. (NYSE: AAP | AAP Price Prediction) is the second largest auto parts retailer in the United States, Puerto Rico and the Virgin Islands. It operates more than 4,000 stores under the Advance Auto Parts brand, as well as nearly 200 AutoPart International locations. It sells to both do-it-yourself customers and professional installers.
The stock has been hammered despite a report in May of better than expected quarterly earnings that were higher year over year. The Jefferies team likes the current setup and noted this:
We recently spent the day with management and come away from our discussions confident that the company is on track to see operating margin improvement (we model 9.8% in fiscal year 2020 vs. 7.8% in fiscal year 2018) from enhanced supply chain management, merchandising initiatives and operating efficiency. That said, management also noted that a slower transition to typical Spring weather is likely to create some regional softness.
Advance Auto Parts investors receive a tiny 0.16% dividend. The Jefferies price target for the shares is a lofty $195, while the Wall Street consensus target is nearby at $193.72. The stock ended Friday trading at $155.35 a share.
Callaway Golf
It is pretty hard to play golf when courses are under water and it’s pouring, so Callaway Golf Co. (NYSE: ELY) could be a big winner with some sunny days. The company engages in the manufacture and distribution of golf equipment and accessories.
The Golf Clubs segment includes Callaway Golf woods, hybrids, irons and wedges; Odyssey putters, including Toulon Design putters by Odyssey; packaged sets; and sales of pre-owned golf clubs. The Golf Balls segment designs, manufactures and sells Callaway Golf and Strata golf balls.
The Gear, Accessories and Other segment consist of soft goods products that include golf apparel and footwear, golf bags, golf gloves, travel gear, headwear and other golf-related accessories, as well as retail apparel sales from the firm’s joint venture in Japan and Ogio-branded products.
The Jefferies team has a $27 price target on the stock, while the posted consensus target is $22.025. The stock closed most recently at $15.71 per share.
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Gap
This top retailer could be poised to benefit from continued extra consumer spending, and it is a Franchise Pick at Jefferies. Gap Inc. (NYSE: GPS) sells private label merchandise through three main retail concepts: The Gap, Old Navy and Banana Republic, along with smaller growth vehicles Athleta and Intermix.
The company also sells its products through its company websites. Most of its international stores are Gap stores, concentrated in Western Europe (France, United Kingdom), Japan, China and Canada. The company has over 3,500 stores worldwide.
The announcement earlier this year of the spin-off the Old Navy brand was greeted well by Wall Street. The remaining company, which still needs a name, will consist of the namesake Gap brand, Athleta and Banana Republic, plus a couple of lesser known brands. It will have annual revenues of about $9 billion, compared to Old Navy’s $8 billion, the company stated.
The Jefferies analysts are very bullish on the company and said this in a recent report:
The Company reported results last week and shares traded off significantly as poor weather hurt traffic trends and Gap brand came in much weaker. While May weather hasn’t been great, we see second half comparisons and margin trends improving and anticipate results improving from here. We highlight that on a sum of the parts basis, there’s room for shares to double.
Gap shareholders are paid a huge 5.33% dividend, though that could be cut. The $40 Jefferies price target is well above the posted consensus target of $30.89. The shares were last seen trading at $18.21 apiece.
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Home Depot
This company remains the undisputed leader in the home improvement retail category, and summertime is huge for the retailer. Home Depot Inc. (NYSE: HD) is the world’s largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico.
Home Depot stores sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance and professional service programs to do-it-yourself, do-it-for-me and professional customers.
Home Depot shareholders receive a 2.83% dividend. Jefferies has set a $219 price target. The Wall Street consensus price objective was last seen at $205.86, and the shares closed last Friday’s trading at $197.30.
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All these stocks are well off their 52-week highs and may be offering investors some outstanding entry points. Having struggled in May, they all may be poised to offer some solid alpha potential, especially with the market back near the all-time highs.
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