Foot Locker may lead the next revival in retail stocks

The market has now gone through a complete cycle in record time. From 2020 to today, it appears that interest rates and the underlying business cycle have moved from one end of the spectrum to the other without causing the turbulence that typically accompanies such a swing.

These cycling swings may be the time to start fishing for outsized returns. However, you don’t want to proceed blindly. So this is how professionals on Wall Street tend to behave. For simplicity’s sake, there are consumer staples stocks that are characterized by their relative immunity to the economic cycle. Consumer discretionary stocks, by contrast, are known for their high exposure to where the cycle is or should be.

Knowing what you know now, it would be unlikely that you would choose to look at stocks like Procter & Gamble NYSE: PAGE, which falls within the basic necessities sector. People will likely continue to buy their products regardless of whether it is a booming or declining recession. For the same reason, stocks are popular Foot Locker Inc. NYSE:FL become very attractive to investors looking for value in an upcoming swing.

The macroeconomic framework is favourable

What could make major market players look at these cyclical stocks in the first place? After all, the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY it has underperformed the broader S&P 500 index by as much as 5% over the past six months.

However, looking at the past five days, the consumer discretionary sector has outperformed the broader market, meaning traders and investors may already be evaluating their future expectations for where the market may pivot in the coming months. That’s why their opinions are starting to change.

The Federal Reserve (Fed) has raised the possibility of interest rate cuts coming this year. However, some market participants have yet to be convinced of the timing of these cuts. According to the FedWatch tool of CME Group Inc. NASDAQ: ECMTraders are now considering these interest rate cuts as early as May this year.

Lower interest rates mean cheaper money in the market. You better believe that the American consumer will be the first to benefit from cheaper money, more flexible financing rates, and promotions from their favorite brands, like Foot Locker.

Whereas other players in the commercial space, such as Dick’s Sporting Goods Inc. NYSE: DKS, are trading at much more expensive levels than Foot Locker, not only based on price action but also on a traditional valuation basis. This is the fundamental case for investors to initiate a value-seeking investigation.

As of the price action, the entire sector is trading at an average of 90% of its 52-week high prices. In contrast, Foot Locker today has an attractive 73% discount. By digging into this performance gap, institutions like it Charles Schwab Co. NYSE:SW and the Royal Bank of Canada NYSE:RY they started buying shares. And the bullish case for Foot Locker gets better.

Why Foot Locker?

From the price discount considered to previous levels over the past twelve months, investors will notice other valuation metrics that make Foot Locker a clear buy target. By increasing their stakes up to 9% and 12% in the last month, institutions are leading the way to show you what lies ahead.

On a price-to-book basis, the entire industry trades at an average of 4.1x, while direct competitor Dick’s is an overvalued name with a P/B of 5.8x and trades at 99% of its high of 52 weeks to not offer discounts. to its shareholders.

Foot Locker, on the other hand, trades at a 78% discount to the industry with its P/B valuation of 0.9x. But this is all in the present; It gives you a leg to stand on, but if you want to run, then it’s the future you need to understand.

Analysts expect an average earnings per share growth rate of 8% over the next twelve months for the sector and a more specific 4% for Dick’s. At the same time, analysts see much more upside in Foot Locker’s financials, predicting a significantly higher EPS growth rate of 46% over the course of the year.

Considering that EPS typically determines stock prices, you can now see why Foot Locker’s discount in no way discounts 46% growth. In contrast, other stocks are not only already pricing in their growth, but are also overextending these projections.

Before you consider Foot Locker, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Foot Locker wasn’t on the list.

While Foot Locker currently has a “Hold” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here