The online used-car dealer Carvana is one of Wells Fargo analyst Zachary Fadem’s top picks.
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Although the Covid-19 pandemic remains a real danger, many investors are looking past the threat to later this year, when widespread vaccination may usher in a return to normal. Wells Fargo argues that some retailers that were winners in 2020 will be able to keep rallying, even in this changing environment.
Analyst Zachary Fadem took a look at the retail sector on Wednesday, noting that the market is focused on the “battle of bifurcation,” pitting pandemic winners against reopening plays, growth versus value, and e-commerce versus bricks-and-mortar stores. Yet for hard-line retailers, those selling more durable goods, “these lines are often blurred, which we believe sets up several opportunities to own high quality, long-term structural winners at attractive valuations,” he wrote.
Stocks could move this year in response to headlines about Covid-19 outbreaks and progress in developing vaccines, but aside from day-to-day choppiness, Fadem thinks a few main themes will dominate. Two key factors are the continuing strength of the consumer and higher sales for retailers that are benefiting from structural changes to the economy, such as the rise of e-commerce. Also on the list are big payouts to shareholders from cash-rich companies.
Finally, because retailers’ margins were hurt last year as the pandemic disrupted their supply chains and increased their costs, the companies are now poised to show improvements as those factors fade away, he said.
Given this backdrop, his top picks are Home Depot (ticker: HD), Lowe’s (LOW), Carvana (CVNA), Vroom (VRM), and AutoZone (AZO). He rates all five stocks at Overweight, with price targets of $310, $190, $300, $55, and $1,375, respectively.
All but AutoZone had a great 2020, which Fadem acknowledges. Yet while home-improvement and e-commerce auto stocks performed “at unprecedented levels in 2020,” they still look poised to be structural winners, he argues. He said AutoZone should benefit from many of the factors that have lifted other retailers, even if the market isn’t giving the stock much credit for that now.
By contrast, he thinks gains for retailers that benefited from the work- and learn-from-home trends, such as Wayfair (W), At Home (HOME), Best Buy (BBY), Bed Bath & Beyond (BBBY), and Michael’s (MIK), could prove to be more transitory. Those stocks “could see harder landings in 2021,” the analyst says.
He warns that Wayfair could be especially vulnerable if investors begin to focus on how difficult it will be for the online home-furnishings retailer to report an improved year-over-year performance, not to mention the stock’s valuation. He has Equal Weight ratings on all of these stocks, save Bed Bath & Beyond, which he rates Underweight.
Write to Teresa Rivas at [email protected]
