The markets continue to face uncertainty as virus cases surge and lawmakers remain deadlocked in negotiations for the latest stimulus bill. Stocks are finishing the week down, even after the Pfizer (PFE) and BioNTech (BNTX) vaccine received the backing of an advisory committee of the Food and Drug Administration (FDA).
This sideways trading for the overall market is likely to continue into the new year until a stimulus bill is passed, and there is a clear path for vaccinations. One area of the market where I see positive sentiment is retail, where I forecast a strong holiday season this year. Investors should take a look at TJX Companies, Inc. (TJX), a discount retailer with a solid e-commerce platform.
But first, let's take a look at the markets over the past few days; then, I will provide more insight into TJX.
Market Commentary
Stocks were mainly lower today as the prospect of another stimulus bill is looking bleak. Senate Majority Leader Mitch McConnell and other Republicans are adamant about including protections that would shield companies from virus-related lawsuits, a non-starter for Democrats. McConnell also wants to drop aid for state and local governments. As of mid-day, the S&P 500 and Nasdaq Composite Index were down about 50 basis points.
On the economic front, producer prices rose 0.1% in November, after climbing 0.3% in the previous month. The core prices (ex-food and energy) increased by 0.1% month-over-month and 1.4% year-over-year. On Thursday, weekly initial jobless claims rose to 853,000, which was more than expected. The consumer price index (CPI) increased by 0.2% in November, with the core figure up 1.6%. Stocks finished mixed on the day.
Meanwhile, the U.S. surpassed 3,000 COVID-related deaths for the first time on Wednesday, and the S&P 500 and the Dow industrial Average are on course for the third consecutive daily decline. The three major indexes are on track to end the week down.
Market Outlook
While the market seems to be ignoring the encouraging news about the COVID vaccine today, I believe the FDA approval has increased hope for stronger economic growth next year. This has led to a rotation into stocks that not only suffered during the pandemic but will benefit from an improving economic outlook. This includes sectors such as energy, financials, and other cyclicals.
We are already seeing this take place as energy stocks are having a great month, as the Energy Select Sector SPDR ETF (XLE) is up almost 12% in only nine trading days in December. In the meantime, however, I expect market volatility to continue. Even with the FDA heading towards final approval for the PFE and BNTX vaccine, we still need to get the population vaccinated, and the virus isn't going anywhere until then.
According to data released by the U.S. Department of Health and Human Services, at least 200 hospitals were at full capacity last week. So, for the time being, I am bullish on the retail industry as I expect a strong fourth quarter due to holiday sales. This is due to pent-up demand from people stuck at home and more money on hand as many spent less this year on travel and restaurant dining. This is a perfect environment for TJX to build on its gains so far this year.
TJX Companies, Inc. (TJX)
TJX is a leading off-price retailer of apparel, home fashions, and other merchandise. It sells a variety of branded goods that it purchases from a network of over 21,000 vendors worldwide. The company typically undercuts conventional retailers' regular prices by 20%-60% due to a flexible merchandising network, low-frills stores, and a treasure-hunt shopping experience.
The company operates over 4,500 stores under the brands of T.J. Maxx, Marshalls, HomeGoods, Homesense, and more. Initially, TJX fell at the beginning of the pandemic along with the rest of traditional brick-and-mortar stores. The stock fell from $63.87 on February 20th to $36.76 on March 23rd, a loss of 42.4%. But the stock battled back and is up 80.1 % since.
During the second quarter, the company's revenue improved as it reopened stores. Its sales trend increased again in the third quarter, with revenues coming in at $10.1 billion, well above the consensus estimate of $9.4 billion. Its HomeGoods brand posted 15% comparable sales growth and an increase of 19% in total sales. This was driven by a renewed interest in home decoration and remodeling, with people being forced to stay at home.
TJX has also been benefiting from its e-commerce growth efforts. As people have been forced to shop online, the company has undertaken initiatives to increase its online sales and strengthen its e-commerce platform. For instance, TJX is on track to add new categories and brands to its online stores in the U.S. and UK. The company is also planning to offer a wider assortment of gifts online for the holiday season. This bodes well for the company due to its off-price model and the fashion brands it stocks.
The company also declared a dividend hike before the holidays. It recently announced that its next quarterly dividend would be $0.26 per share, a 13% year over year increase. This signals optimism on management's part since it had previously suspended its payout early in the pandemic.
I am even optimistic for sales after the holidays as the vaccine rollout should lead to more foot traffic at its physical storefronts. Revenue is expected to grow 30.3% next year, while earnings are estimated to be up a whopping 520.9%.
The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" for Trade Grade, Buy & Hold Grade, Peer Grade, and a "B" for Industry Rank. Those are the four components that make up the POWR Ratings. The stock is also ranked #2 in the Fashion & Luxury industry.
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TJX shares were trading at $66.07 per share on Friday afternoon, down $0.45 (-0.68%). Year-to-date, TJX has gained 8.60%, versus a 15.35% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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