Stock Analysis & Ideas

Hold These 2 Battered Retail Stocks, Says Wall Street

Story Highlights

Best Buy and Williams-Sonoma are beaten-down discretionary retail stocks that have been on the receiving end of price target downgrades over the past few months. As recession fears look to peak over the coming months, the following names may be worthy contrarian bets for brave contrarians.

It’s a harsh environment for discretionary retailers as consumers begin to prepare for what could be a dragged-out recession in 2023. With the Federal Reserve willing to do whatever it takes to bring inflation back down, next year’s recession has the potential to be another wild ride. Let’s compare the following two discretionary stocks to gauge the value to be had in consumer electronics retail heavyweight Best Buy (NYSE:BBY) and home goods retailer Williams-Sonoma (NYSE:WSM).

Both stocks are coming off vicious year-to-date plunges. Still, such (likely) overextended falls could set the stage for a better 2023.

Though it may be too soon to go bottom fishing in the retail waters, investors willing to focus on the ensuing bull market have a lot of reasons to consider the fallen retailers while they’re down and out. One has to think that a recession is carefully considered in the share prices. If anything, the severity of a looming recession may be exaggerated amid the latest slip in markets.

The next year or two will be cloudy for discretionary retailers. While there’s more room to the downside in a continuation of this bear market, there’s also a lot of bounce-back upside if 2023 isn’t nearly as terrible a year as investors and pundits expect.

The real value from beaten-down retailers could lie in the low expectations for coming quarters. When everybody sees recession-induced weakness ahead, it can pay to be on the opposite side of a trade.

Eventually, analyst price target (and quarterly earnings) estimates will fall too low. In such a scenario, a seemingly hopeless discretionary retailer may be able to find its feet well before the worst part of a recession (think peak unemployment) even has a chance to happen!

For now, BBY and WSM shares have Hold consensus ratings. Yes, a lot of damage is already in, but around half of analysts would rather wait and see before attempting to catch a falling knife.

Best Buy (NYSE:BBY)

With the rising costs of food and other necessities, big-ticket consumer electronics purchases can wait. Though Black Friday was a promising sign that consumers aren’t about to put away their wallets for good when it comes to discretionary items, it seems unlikely that Best Buy’s rocky ride will end anytime soon – not with a recession closing in.

At writing, shares of BBY are down more than 40% from peak levels after a strong bounce from lows not seen since 2020.

Best Buy remains one of the most resilient brick-and-mortar players in electronics. Still, it’s unclear when consumers will feel upbeat enough to buy that new 55” TV. Depending on the severity of the seemingly imminent recession, BBY stock may be either a bargain or a value trap with more room to fall.

The stock trades at 0.4 times sales and 12.0 times trailing earnings. In my view, Best Buy may not be cheap enough to bear the recession risks and headwinds ahead. Bank of America (NYSE:BAC) recently turned bearish on the retailer, noting it’s no fan of the 2023 setup.

What is the Price Target for BBY Stock?

Wall Street isn’t enthusiastic about Best Buy. The average BBY stock price target of $80.00 implies 0.57% downside for the year ahead.

Williams-Sonoma (NYSE:WSM)

Williams-Sonoma is another retail stock that boomed in 2021 only to go bust in 2022. The stock is fresh off a 50%+ peak-to-trough drop, with an absurdly-low 7.2 times trailing earnings multiple. Shares scream of deep value, but braving the rough waters could entail pain before any meaningful gain.

The Williams family of brands has strengthened considerably in recent years. Greater brand affinity tends to accompany greater pricing power and margins. As a retailer of nice-to-have home and kitchen goods, though, it’s hard to envision sales holding up in the face of recession headwinds.

For a stock with a history of enduring excruciating multi-year slumps of 50-85%, investors appear unwilling to give WSM stock the benefit of the doubt at the first hint of economic trouble. While Williams has come a long way to diversify with “less discretionary” or smaller-ticket items, the company will always be at the mercy of macro factors, and right now, the macro does not look pretty!

What is the Price Target for WSM Stock?

Expectations are already so low for Williams. Still, analysts likely want to see more resilience before considering any upgrades. The average WSM stock price target of $130.35 implies 10.5% upside potential from here.

The Takeaway

Catching a falling knife may be dangerous in this market environment. However, the following retailers, I think, are worth watching as the holiday season comes and goes without so much as a Santa Claus rally.

Wall Street would rather wait and see when it comes to the two retailers, and it’s no mystery as to why, given headwinds and unknowns in store for 2023.


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