The analyst began coverage of Lowe's stock with a Buy rating.
Justin Sullivan/Getty ImagesWith vaccinations slowly bringing the U.S. closer to a return to normalcy, investors have been looking to position themselves to take advantage of a reopening. In many cases, that means punishing winners, like hard-line retailers, but Citigroup argues that there is still reason to own stocks in the sector.
Analyst Steven Zaccone took a look at hard-line retailers—those that sell more durable goods, rather than apparel—writing that the group has certainly done well during the Covid-19 pandemic, and that sales have remained strong in 2021. Yet he said that as consumers get vaccinated and have more choices about how to spend their money, from restaurants to travel, there is a concern that “orphaned categories that suffered during the pandemic” will reclaim a bigger piece of the pie.
Still, he said, selective investors can find attractive retailers to own. “Based on this looming shift, we favor retailers that have resilient business models despite macro volatility,” Zaccone wrote, as well as those that are market-share leaders and have flexibility to shield their margins even if sales slip. A recent selloff in some growth names provides a buying opportunity, he said.
Ultimately, Zaccone argued, five themes will dominate retail this year: How much consumer spending will shift in a reopening; whether demand at pandemic winners is sustainable; how e-commerce will help the big get bigger; the ability of companies with strong balance sheets to weather changes; and wild cards, from higher freight rates to gasoline prices.
Keeping this in mind, he began coverage of six stocks with Buy ratings. Floor & Décor Holdings (ticker: FND) is his top pick, with a $107 price target. Shares closed Monday at $90.05.
His other calls are AutoZone (AZO), with a $1,424 target; Advance Auto Parts (AAP), at $193, Home Depot (HD), at $195; Lowe’s (LOW), at $195; and RH (RH), with a $560 target.
Zaccone reserved a single Sell rating for Best Buy (BBY), with an $86 price target, saying he is concerned about more difficult comparisons, and a lack of pricing power. A need for further investment “will likely make margins worse before they get better,” he wrote. The stock closed Monday at $106.57.
Write to Teresa Rivas at teresa.rivas@barrons.com
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