In this article, we will look at the 10 Cheap Retail Stocks to Buy According to Analysts. Let’s look at where CVS Health Corporation (CVS) stands against other cheap retail stocks to buy according to analysts.
Overview of Recent Consumer Buyer Trends and the Retail Sector
On September 18, the Fed cut interest rates for the first time since the Covid-19 pandemic, slashing the benchmark rate by half a percentage point. This brought to a range between 4.75% and 5%. The adjustment aims to relieve consumers and businesses suffering from high borrowing costs and protect the labor market, which was showing signs of slowing. This strategic move by the Fed is interpreted as a sign of relaxation against inflation and a welcome change for businesses and consumers.
Although the impact of the lower interest rates is expected to be substantial, it will likely take time to make its way through the economy. The prospect has, however, strengthened confidence in Americans that inflation will continue to cool, paving the way for good days ahead. According to research by BCG, consumer confidence is already recovering, albeit slowly, across the world and in the US. With people increasingly believing that their personal finances are improving, the sentiment is likely to continue on an upward trajectory if circumstances do not change.
A recent survey by the Center for Customer Insight (CCI) suggests that the extent to which increasing consumer confidence will translate into increasing consumer spending is likely to vary across markets and product categories. The survey reported that the percentage of respondents with personal finance concerns dwindled from 39% in 2023 to 26% in 2024. These trends are significant for retailers, as the financial health of consumers in the country affects the categories and services they prioritize when spending money.
The Future of the Retail Sector
According to the WTW Global Retail Survey for 2024, around 52% of retailers this year expect increased profitability in the coming two years. In addition, approximately 48% of retailers are looking to leverage artificial intelligence in their operations to offer their customers a personalized and efficient shopping experience. However, with more and more businesses turning towards AI, around 43% of the respondents voiced concerns about high cybersecurity risks likely to arise with increasing reliance on new technologies. Despite the risks, a majority of retailers are incorporating AI into their operations, streamlining and expediting their functioning.
On June 24, Simeon Gutman, an analyst at Morgan Stanley, joined CNBC’s “The Exchange” to discuss the impact of tech and AI on retailers and how these companies are leveraging technology to boost profit margins. Here is what to say about retail companies in this respect:
“Walmart’s the one that comes to mind the first…, you’re hitting the nail on the head with several of these aspects of tech diffusion, and on top of it, they’re gaining market share in terms of tech diffusion. AI is easily one of them, big scale, lots of data, a lot of opportunity to go through their data and enhance both the frontend of their business, drive more sales to customers, make things easier, and improve the backend.”
According to Gutman, big-box retailers are taking the lead in infusing tech and AI into their internal operations, increasing profit margins and streamlining operations. Such innovative trends may allow the retail industry to bounce back in the market, taking the lead and leading the change.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded retail companies with a forward P/E ratios of less than 23 (the broader market is trading at a forward P/E of 23, as per data from WSJ). From this list, we selected the 10 stocks with the highest analyst upside potential as of September 23, 2024, and used that as our ranking metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Cheap Retail Stocks to Buy According to Analysts
CVS Health Corporation (NYSE:CVS)
Forward P/E: 8.92
Analyst Upside Potential as of September 23, 2024: 9.51%
Number of Hedge Fund Holders as of Q2 2024: 60
CVS (NYSE:CVS) is a health solutions retailer that operates in four segments: health care benefits, health services, pharmacy & consumer wellness, and corporate/other. The health care benefits segment offers an elaborate range of voluntary, traditional, and consumer-directed health insurance products and related services. These include medical, pharmacy, medical management capabilities, dental and behavioral health plans, Medicare Advantage, Medicaid health care management services, and Medicare supplement plans.
The Health Services segment specializes in a complete range of pharmacy benefit management solutions and delivers healthcare services in its medical clinics, at home, and virtually, offering provider enablement solutions. The Pharmacy & Consumer Wellness segment dispenses prescriptions in retail pharmacies. It also provides diagnostic testing, pharmacy patient care programs, and vaccination administration.
CVS (NYSE:CVS) is running on solid fundamentals. It generated over $91 billion in total revenue and $8 billion in operating cash flow in the first half of 2024. Most of its businesses are performing well, and the company continues executing strategies to drive its integrated value. It serves more than 186 million people, expanding the number of consumers using two or more CVS Health offerings to 57.7 million in the first half of 2024. This translates to an increase of around 2.5 million consumers. The company also increased the number of Aetna medical members using CVS pharmacies to 9 million, an increase of 8% as compared to last year. It now has around 13.8 million Aetna medical members covered by Caremark, showing a 13% increase compared to 2023.
In addition, the company expanded its digital reach with around 60 million unique digital customers leveraging its platform to fill prescriptions, schedule health services appointments, and purchase wellness products, leading to growth and profitability. CVS (NYSE:CVS) is also following a multi-year opportunity to deliver $2 billion in savings, driven by optimizing and streamlining its processes, increasing the use of artificial intelligence and automation across its enterprise, and rationalizing its business portfolio. The company is executing these initiatives in a way that does not compromise consumer needs. Such savings will allow the company to invest in new opportunities and businesses to continue on the path to profitability.
Ariel Global Fund stated the following regarding CVS Health Corporation (NYSE:CVS) in its Q2 2024 investor letter:
“American healthcare company, CVS Health Corporation (NYSE:CVS), also declined following disappointing earnings results and a subsequent reduction in full year guidance. The miss was primarily due to increased utilization of Medicare Advantage plans and weakness in the health services segment driven by the loss of a large client and continued pharmacy client price improvements. In response, management reiterated its focus on improving margins and enhancing its positioning in Medicare Advantage. CVS believes the program can remain an attractive business for Aetna and CVS Health over time and will construct its bid for 2025 as a multi-year repricing opportunity across plan level benefits. Meanwhile, CVS continues to return capital to shareholders through dividends and a recent accelerated share repurchase transaction”.
Overall, CVS ranks tenth among the 10 cheap retail stocks to buy according to analysts. While we acknowledge the potential of CVS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CVS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.