D.A. Davidson experts say that Dick’s Sporting Goods Inc. and Best Buy Inc. stocks are likely to do poorly from Black Friday to the end of the year, since they are two retailers that are most affected by the holiday season.
A group of experts led by Michael Baker wrote in a note to clients on Friday that Dick’s DKS -3.00% makes just under 40% of its profits in the fourth quarter and Best Buy BBY 2.08% makes about 30%.
From now until the end of the year, Dick’s stock usually drops 1.5%, and Best Buy’s stock usually drops 2.9%, the experts wrote.
Best Buy “tends to be volatile because it has done better than the market every year since 2010 and worse than the market every year since then.” “But the bad years have been bigger than the good ones, and on average they have been 440 basis points worse than the market,” the note said.
The analysts said that retail has done worse than expected in 10 of the last 14 holiday seasons. They based their analysis on the SPDR S&P Retail exchange-traded fund XRT -0.11%, which has done worse than the S&P 500 SPX by 0.56% and the S&P Equal Weighted Index SP400EW by 0.11% during that time.
The note said, “Even though the calendar is tight, we are more optimistic about holiday sales and retail stocks after the election.” “But we’re a little more cautious in the short term because our group usually does worse from Black Friday to the end of the year.” This is what we call “The Silly Season,” and you should be extra careful with names that have a lot to do with the holidays.
The following chart shows that both BJ’s Wholesale Club Holdings Inc. (BJ -0.49%) and Grocery Outlet Holding Corp. (GO -1.18%) have done badly. However, the experts wrote that the data only goes back six and five years after their 2018 and 2019 IPOs.
The holiday season has also been good for Ulta Beauty Holdings Inc. ULTA 3.04%, but the stock hasn’t done as well as usual.
The market does best when it has “Christmas in April,” the note said, naming Lowes Cos. LOW -0.28% and Home Depot Inc. HD 0.45% as two of the safest holiday names to own.
Since the beginning of the year, Lowe’s has shown an average increase of 5.1%, which is 360 basis points better than Home Depot. On the other hand, Home Depot has shown an average increase of 3.7%, which is 220 basis points better than Lowe’s.
There have been 14 years in which Lowe’s has done better than Home Depot. In that time, Home Depot has done better nine times. In the fourth quarter, Lowe’s makes 21% of its profit and Home Depot makes about 16%.
AutoZone Inc. and other companies that make auto parts also tend to do better than expected.
AZO fell by 0.64%. Auto parts stores usually make about 21% of their profit in the fourth quarter.
While Walmart Inc. WMT 0.67% has average holiday exposure, it has had the most years since 2010 when its stock has not done well, with 11 out of 14. On average, the stock does about 50 basis points worse than expected.
“We think the reason is that Walmart is seen as a harbinger,” the note said. “And since retail stocks are under a lot of pressure right now, WMT feels the same pressure.”
On the plus side, retail should be ready for a January rally once the Christmas results are in.
In the past, January and February have been better months for outperforming the sector. On average, the XRT gained 3.8% in the first quarter, beating the S&P 500 by 100 basis points.
“That outperformance in the first quarter has only happened six times in the last fourteen years,” the analysts wrote. “But when retail does outperform in 1Q, it does by a significant amount, with about 1,000 bps of outperformance in the six years that the XRT has been better than the market.”
So far this year, the XRT has gone up 14.6% and the S&P 500 has gone up 25.8%.
