Opinion: Best Buy and Five Other Brick-and-Mortar Retailers Whose Shares are Worth Buying in 2019

Death by e-commerce has been exaggerated — these stores are thriving amid the internet onslaught

To some investors, it may be counterintuitive to buy brick-and-mortar retail stocks. After all, this is the age of e-commerce, and there are signs consumer spending is cooling.

Sure, Amazon.com AMZN is the most obvious evidence of the e-commerce revolution. But smaller companies such as Wayfair W are also taking market share — its stock exploded 30% in a single day after blowout earnings. And the bankruptcy of onetime mall mainstay Sears SHLDQ casts a pall over the brick-and-mortar retail industry.

And, bigger picture, the outlook for traditional consumer stocks is getting uncertain. Federal Reserve Chairman Jerome Powell admitted as much this week, warning of “conflicting signals” in the economy during testimony before lawmakers.

Still, there are old-school retail stocks that are doing well. Case in point: Best Buy BBY which surged 15% Wednesday on blowout earnings. Revenue smashed expectations, and the company reported a 3% increase in same-store sales.

There are plenty of opportunities in retail even if the big-picture trends seem to be moving in the other direction. Here are five other retail companies that, like Best Buy, have produced great performance lately and are worth considering as investments in 2019.

Costco

Ask around and you’re bound to find one of those people who worships at the cult of Costco COST for grocery items including rotisserie chickens or its Kirkland brand vodka. Investors have lots of reasons to keep coming back, too, as the shares have risen more than 90% in the past five years, nearly double the returns of the S&P 500 SPX in the same period.

Now, Costco did spook a few folks in December after weaker-than-expected revenue. However, analysts remained confident and have been vindicated as shares have snapped back.

And why not? The company’s renewal rate is over 90% with its members, a population nearly 100 million strong that drives about $3 billion in revenue a year. Overall revenues are rising, too, with total sales set to expand by nearly 10% this year to over $150 billion; a just-released sales tally for January showed an 8% increase on the month, showing Costco is tracking with that brisk growth outlook.

On top of all this, this brick-and-mortar mainstay has a few digital tricks up its sleeve; in the latest American Customer Satisfaction Index, a consumer survey that ranks stores in the U.S., Costco actually topped Amazon for the highest satisfaction among internet retailers. That rating coupled with strong in-store metrics and loyal customers is a sure sign that this company has a bright future.

Five Below

Another growth-oriented name in retail is discounter Five Below FIVE a store that offers a host of toys, school supplies, snacks and décor all for less than $5.

Quirky products coupled with bargain prices has been a big hit with consumers. Five Below doesn’t post fourth-quarter numbers until late March; however, third-quarter figures showed 22% growth in net sales and 33% growth in earnings per share (EPS). That’s pretty much par for the course for this retailer, which has boasted average revenue growth of more than 20% over the past five years.

The secret of Five Below is something Costco loyalists would attest to: It’s fun to go shopping there. The bright stores are engaging, the product lines connect with young Americans, and it’s easy to treat yourself to an impulse buy that won’t break the bank.

Here’s an example I swear I’m not making up: When I asked my daughter what she wanted to do on her birthday, she rattled off the usual like a movie, junk food — but also a trip to Five Below!

I don’t pretend to understand the appeal of squishy stuffed animals or groaner puns on graphic T-shirts. But what I do understand is the profit potential, as this stock has risen more than 200% in the past two years.

Boot Barn

If I’m out of my element when it comes to the tastes of a preteen girl, I’m equally adrift when it comes to the gear sold by Boot Barn BOOT But I don’t have to personally like cowboy boots to understand the appeal of this stock, which has jumped more than 60% in the past 12 months.

“Specialty retail” has gotten a bad name because many stores have been disrupted out of business. Radio Shack became obsolete as folks could buy all manner of arcane electronics cheaply, and mainline apparel companies now face big pressures on both price and style from theoretically limitless online competition. But there remain companies like Boot Barn that have a strong brand, a good focus and a promising future.

Case in point: Boot Barn is predicting 14% revenue growth this fiscal year after increasing guidance in its February earnings report, and another 11% or so in fiscal 2020. Net sales have soared from $400 million in fiscal 2015 to a predicted $770 million when fiscal 2019 ends in a few months. So much for death by e-commerce!

In addition to strong fundamentals and a great niche in Western wear, a luxury category where quality boots and hats can regularly run $500 or more, Boot Barn also has more accessible consumer lines as well as work wear that ensures a diverse product portfolio that will keep it in favor.

Dollar Tree

On the other side of the retail spectrum is a value play: Dollar Tree DLTR The discounter has attracted the attention of activist investors including Starboard Value who think they can unlock shareholder value in a big way.

As representative of that value proposition, Dollar Tree DLTR still trades for a forward price-to-earnings of only 16 or so even after a big run of 20% from its December lows.

At its core is the lack of realized synergies, or cost savings, between legacy Dollar Tree operations and the Family Dollar brand it acquired in an $8.5 billion deal almost five years ago. Still, this discounter has a lot of potential. Headline sales are set to grow incrementally in 2019, and EPS will rise by double digits.

Whether Starboard succeeds in agitating for a spin-off of Family Dollar to cut and run or whether the headlines simply spur management into making hard choices for the betterment of shareholders, either solution looks very good these days on Wall Street.

And as a largely urban and suburban discounter, this retailer is recession-proof and Amazon-proof as it sells low-priced essentials. That makes it certainly worth a look from value investors.

Bed, Bath & Beyond

Another value play that could be staging a comeback in 2019 is Bed, Bath & Beyond BBBY While this specialty-home-goods retailer has assuredly fallen on hard times, with a decline of about 65% across the past five years, like Dollar Tree there are signs that brighter times are ahead.

To begin with: Bed, Bath & Beyond’s BBBY stock is up 45% so far in 2019 after soaring 20% in a single session after strong earnings and an improved outlook in January. Shares have not just held on but have moved steadily higher in the intervening weeks. What’s more, even after this run Bed, Bath & Beyond’s stock BBBY boasts a forward price-to-earnings ratio (P/E) of less than 10.

Revenue has flat-lined, and margins are weak. But, clearly, investors were discounting this stock too steeply, and there is value to be had here with the hopes of a turnaround. After all, the competitive pressures that have weighed down the retailer are in many ways priced-in after the stock plunged below even pre-crisis lows in December.

Now, I’m not saying that Bed, Bath & Beyond is back, or even that it’s ready for sustained growth. But we’ve seen this movie before in which embattled retailers mount a brief snap-back rally after Wall Street realizes it has been overly negative.

Bed, Bath & Beyond isn’t destined for bankruptcy. Share momentum is great in the past two months, and the valuation is still attractive after the recent run. On top of a single-digit P/E, the company is valued at about $2.2 billion with some $700 million in cash and investments on the books to sweeten the pot.

You don’t have to hold the stock forever. But in 2019, it may be wise to consider a short- or medium-term position in this retailer, which seems to be on the upswing.

Article was originally published by Jeff Reeves at marketwatch.com