In this article I use AAII’s A+ Investor Stock Grades to provide insight into three retail stocks. With retail sales data beating market expectations, should you consider the three stocks of Alibaba Group Holding Ltd. (BABA), Dillard’s (DDS) and JD.com (JD)?
Retail Stocks Recent News
Retail sales in the U.S. increased 0.4% month over month in October 2024, surpassing market expectations of 0.3%, as reported by the U.S. Census Bureau. This builds on the 0.8% increase in September, highlighting persistent strength in consumer spending.
Deloitte’s annual holiday retail forecast predicts a 2.3% to 3.3% increase in holiday retail sales for 2024, amounting to $1.58 trillion to $1.59 trillion during the November to January period. A key driver of overall retail sales growth is expected to be e-commerce, with online sales projected to grow by 7% to 9% year over year, reaching between $289 billion and $294 billion. Additionally, a Deloitte survey expects an 8% increase in planned consumer spending compared to 2023, with respondents expecting to spend $1,778 this holiday season.
These trends may present a reason to explore retail stocks such as Alibaba Group, Dillard’s and JD.com.
Grading Retail Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three retail stocks— Alibaba Group, Dillard’s and JD.com—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Retail Stocks
What the A+ Stock Grades Reveal
Alibaba Group Holding Ltd. (BABA), founded in 1999 and headquartered in Hangzhou, China, provides technology infrastructure and marketing solutions to empower merchants, brands and retailers globally. It operates across seven segments: China commerce, international commerce, local consumer services, Cainiao Smart Logistics Network Ltd., cloud, digital media and entertainment, and innovation initiatives. The company manages digital retail platforms, advertising platforms and wholesale marketplaces. It also operates international e-commerce platforms and offers logistics services. The company provides cloud services and operates digital media platforms with tools for navigation, business productivity and smart speakers.
The company has a Value Grade of A, based on its Value Score of 96, which is deep value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda).
Alibaba Group has a shareholder yield of 5.2%, which ranks in the 13th percentile among all U.S.-listed stocks. Additionally, its price-to-book ratio is 0.18, which ranks in the 5th percentile and is below the sector median of 1.72. This favorable ratio suggests that Alibaba Group’s stock may be relatively cheap compared to similar companies in its sector.
Alibaba Group has a Momentum Grade of C, based on its Momentum Score of 48. This means that the stock’s momentum is average in terms of its weighted relative price strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%. The ranks are 55, 51, 71 and 31, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –3.7%.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. Alibaba Group has a Growth Grade of B, which is strong. The company has generated positive annual cash from operations in the past five consecutive years and has a five-year annualized sales growth rate of 18.3%, above the sector median of 5.4%.
Dillard’s (DDS) operates retail department stores in the southeastern, southwestern and midwestern areas of the U.S. The company’s stores offer merchandise including fashion apparel for women, men and children, as well as accessories, cosmetics, home furnishings and other consumer goods. It also engages in general contracting construction activities. Dillard’s was founded in 1938 and is based in Little Rock, Arkansas.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Dillard’s has a Quality Grade of A, with a score of 93, which is very strong. The company ranks strongly in terms of its return on assets and buyback yield. Dillard’s has a return on assets of 15.7% and a buyback yield of 1.7%. This is partially offset by its –3.8% accruals-to-assets ratio, ranking in the 43rd percentile of all stocks.
Dillard’s has a Value Grade of A, based on a score of 82, which is a deep value. The company ranks in the 10th percentile for shareholder yield and in the 23rd percentile for its price-earnings ratio. The company has a shareholder yield of 6.4% and a price-earnings ratio of 11.6. A lower price-to-free-cash-flow ratio is considered better value, and Dillard’s has a price-to-free-cash-flow ratio of 11.2. The enterprise-value-to-Ebitda ratio is 5.9, which ranks in the 16th percentile.
The company has a Momentum Grade of B, based on its Momentum Score of 78. This means that the stock’s momentum is strong in terms of its weighted relative price strength over the last four quarters. The ranks are 87, 16, 70 and 75, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 5.9%.
JD.com (JD) operates as a supply-chain-based technology and service provider in China. The company offers computers, communication and consumer electronics products, as well as home appliances and general merchandise products. It also provides online marketplace services for third-party merchants; marketing services; and omni-channel solutions to customers and offline retailers, as well as online health care services. In addition, the company develops, owns and manages its logistics facilities and other real estate properties to support third parties; offers asset management services and integrated service platforms; offers the leasing of storage facilities and related management services; and engages in online retail business. Further, it provides integrated data, technology, business and user management industry solutions to support the digitization of enterprises and institutions, along with technology-driven supply chain solutions and logistics services.
JD.com has a Quality Grade of B, based on a score of 73, which is strong. The company ranks strongly in terms of its return on assets, buyback yield and F-Score. Its return on assets is 5.6%, ranking in the 76th percentile. Its buyback yield of 3.6% ranks in the 90th percentile among all U.S.-listed stocks. Its F-Score of 6 ranks in the 71st percentile. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company.
The company’s Growth Grade is B, which is strong. JD.com has generated positive annual cash from operations in five out of the past five fiscal years and has a five-year annualized sales growth rate of 17.9%.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. JD.com has an Earnings Estimate Revisions Grade of A, based on a score of 81, which is very positive. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
JD.com reported a positive earnings surprise of 15.8% for the third quarter of 2024. In the second quarter, it reported a positive earnings surprise of 51.4%. Over the last month, the consensus earnings estimate for the fourth quarter of 2024 has decreased from $0.756 to $0.751 per share, due to eight upward and seven downward revisions. Over the last month, the consensus earnings estimate for full-year 2024 has increased from $3.790 to $3.979 per share, based on 27 upward revisions and one downward revision.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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