Betting against the American shopper is usually a sucker’s wager. And as consumers gear up for the holidays, having splurged on both Black Friday and Cyber Monday, one investment firm is loading up on retail stocks.
Hennessy Funds has added four retailers to its Cornerstone Mid Cap 30 Fund (NASDAQ:) following a rebalance of the portfolio in October. Hennessy switches up the stocks in the fund annually, screening for companies with relatively low price-to-sales ratios and strong fundamentals.
Ryan Kelley, Hennessy’s chief investment officer and portfolio manager for the Mid Cap fund, said at a lunch event in New York Wednesday that the firm likes three apparel retailers as well as a supermarket chain.
The fund has added three stalwarts of the shopping mall: Gap (NYSE:GPS), Abercrombie & Fitch (NYSE:ANF) and Guess? (NYSE:GES). The other retailer? Organic foods grocery chain Sprouts Farmers Market (NASDAQ:SFM).
Kelley joked that the three clothing store retailers may be companies that people have left for dead due to the increased popularity of online shopping. These three chains, which all cater to younger buyers, are also subject to fickle fashion whims and changing consumer trends. But Kelley thinks this trio should benefit from continued strong consumer spending in 2024. And all three stocks remain attractively valued, even though The Gap and Abercrombie & Fitch have each soared this year. (Guess? has been a market laggard, rising just 4% in 2023.)
Retail Stocks vs. Magnificent 7
Kelley said these retailers may not be as sexy as the so-called Magnificent 7 growth stocks that grab most of the headlines. But he cautions investors to be wary of “market myopia” and look for cheaper opportunities in other sectors since there should be an eventual reversion to the mean.
Kelley added that there aren’t many technology companies in the Mid Cap fund because valuations are too high. To that end, the fund sold its stake in server manufacturer Super Micro Computer (NASDAQ:SMCI) in October as part of this year’s rebalancing because the tech stock, which was added to the portfolio in 2022 and rode this year’s artificial intelligence ( ) wave, is no longer a good value following a nearly 250% surge in 2023.
As for Sprouts, Joshua Wein, a co-manager with Kelley for the Mid Cap fund, said at the Hennessy event that this is a more defensive bet for the portfolio.
Even if the economy does cool next year following the series of interest rate hikes by the Federal Reserve in 2022 and the early part of 2023, consumers are still likely to keep spending on food, beverages, and household goods. Shares of Sprout have gained more than 30% in 2023 but the stock was still trading at a bargain price-to-sales ratio of less than 1 times revenue for the past 12 months. That’s key.
In a market that now is bordering on frothy, investors need to look for stocks like these four retailers that are trading at more reasonable valuations than the giants of tech.
As of this writing, Paul R. La Monica did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.