Amazon.com Inc. (NASDAQ: AMZN) has destroyed much of the retail business, and many retail stocks have been absolutely crushed in the process.
While that's old news, it's too simplistic a view of the industry.
A better way to think about the "Amazon effect" is to simply say the retail landscape has changed.
With that change, there have been some obvious winners and losers.
No doubt for the losers, the changes brought by Amazon have been terribly painful.
It's always a sad day when a business fails. And more retailers are failing by the day as Amazon increases its power.
For investors, that pain can be severe. That explains why retail stocks are trading at significant discounts to the market valuations.
The risk of loss is simply too high.
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But that doesn't mean you should go hunting diving for discounts just because valuations are still low. Most of them are deservedly low.
You are bound to be disappointed.
To find the winners, you need a better plan of attack that will work no matter what's happening in the underlying sector.
Over the many years I have been analyzing the markets, there is a simple formula for finding stocks that have the potential to double in value or more.
The core of that formula can be found in the Money Morning Stock VQScore™ system.
Not only does the VQScore system alert us when a stock is undervalued and poised to break out - it also tell us when stocks have become severely overvalued and are due for a pullback.
It should be no surprise that there are a multitude of retail stocks in the latter category. But the system has alerted us to some winning retail stocks too.
Nobody can predict exactly what the future will bring, especially with a giant like Amazon lurking around every corner. But we cannot let fear dictate our investment decisions.
Instead, the VQScore focuses on the fundamentals that any retailer will require to win the battle and stay relevant despite the competition from Amazon.
Specifically, is the company making money, and are those profits growing at a rate to justify the price for the stock?
It may be bleak out there across the entirety of the retail landscape, but there are stocks to buy.
There are also stocks to sell.
I have one of each.
Here are all the details...
Make Sure This Retail Stock Is Nowhere Near Your Portfolio
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Let's start on the sell side. That's easy.
There are so many retailers that are struggling. Their failure is only a matter of time.
These are the companies to sell, and for the more aggressive and sophisticated investor, this may be a stock to sell short.
In the retail space, we all remember the demise of Circuit City.
The electronics retailer went belly up some time ago.
That has not been the fate of Best Buy Co. Inc. (NYSE: BBY), at least so far.
Even though Amazon is a massive threat to its business, Best Buy has survived with strong management and a strategy that relies on the showroom effect.
Customers have to see and touch what they buy, correct?
Perhaps, but over the long haul, that need becomes less and less important.
The beginning of the end may be at hand for Best Buy.
Analysts expect Best Buy to grow profits from the current year to the next by a whopping 5%.
Some growth is better than none, but Best Buy is not a stock to own.
There is way too much risk to pay the 13 times current-year estimates.
What happens if the floor drops?
There isn't much room for error here, and the bottom could be bankruptcy down the road.
Just ask Circuit City.
Now, here's a retail stock that just lit up our VQScore system and could see demand spike from here...
The Best Retail Stock to Buy Now
The retail sector may be on its knees, but there are companies that are doing well despite the challenges.
Stick to the fundamentals, and profits will follow - especially if we buy at the right price.
I first recommended At Home Group Inc. (NASDAQ: HOME) in December of 2016, when shares were trading for $12.88 per share.
Today, the stock is some 70% higher, with more gains to come.
Here's why: The company is growing profits at a high rate and trades for a fair multiple.
Analysts expect At Home to grow profits by 26% from the current year to the next.
At current prices, shares trade for only 22 times current-year estimated earnings.
Historically, any time the price/earnings ratio is less than the profit growth rate, no matter the industry, shares will appreciate.
No matter what Amazon brings for the future, At Home at least in the near term is a stock to buy simply based on the fundamentals.
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