The ongoing trade dispute between the United States and China continues to batter retail stocks.
This downward pressure has added additional uncertainty to a sector plagued by softening consumer confidence, wide-scale store closures, and even bankruptcies.
Several retailers, like Walmart Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT), defy the impact of tariffs. Their scale, e-commerce strategy, and store strategy give them a competitive advantage, while other retail stocks continue to bomb out.
Companies like L Brands Inc. (NYSE: LB), Macy's Inc. (NYSE: M), and Nordstrom Inc. (NYSE: JWN) have slumped heavily over the last few months.
Of course, some retail stocks are poised for a rebound heading into the holiday shopping season.
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Predicting which retail stock will bounce back is tricky in today's environment. But we have a secret weapon that tells us when a stock is about break out in the coming months.
It's called the Money Morning Stock VQScore™ system. This proprietary algorithm tracks 1,500 of the most profitable companies in the world and assigns them a score from 1 to 4.9.
The score is derived from a deep dive into the company's EPS and demand for the underlying stock.
Any stock that scores 4 or higher means EPS is accelerating and demand for its underlying shares is increasing.
This means it's a "Strong Buy" and is likely to break out in the months ahead.
Today, we'll explain three reasons why this retailer is at the top of our list of stocks to buy now...
This Retail Stock Is Poised for a Huge Bounce in 2020
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]Today's top retail stock to buy is Gap Inc. (NYSE: GPS).
Now, let's start with the bad news. The stock has struggled in 2019. Shares are off 29% since the beginning of the year. Gap continues to face a lot of the pressure from struggling mall foot traffic and its late transition into e-commerce.
With the stock sliding, we're starting to move into a situation where the stock is oversold.
The Fisher family founded the company in 1969. Over 50 years, the company has survived market crashes, inflation, stagflation, and technological innovation. The firm has roughly 3,200 firm-operated stores and more than 470 franchise sites. Its brands include Athleta, Banana Republic, Gap, Hill City, Intermix, and Old Navy.
And unlike most of the competition, the company has actually opened stores in the last year instead of shuttering them. This is the first reason to own the stock.
The company has a strong cash flow figure of $676 million in 2019, a decent debt situation, and a slew of valuable brands. Buried in its balance sheet is its high-performing Old Navy brand. The company plans to spin off Old Navy into its own public company by next year.
The second reason to own the stock: the insider stock holdings.
The Fisher family still has board seats and owns about $1.5 billion in stock. As Money Morning Special Situation Strategist Tim Melvin said last week, "[the Fisher] family fortune and reputation are at stake."
Including executives, company insiders own $2.4 billion in stock. Keep in mind, the total market cap of the entire business is only $6.8 billion.
With this much skin in the game, the executives must have plans to entice investors to go along as they reshape the company. In addition to the 6% dividend offered, the company's executives are also expected to boost shareholder value through a series of stock buybacks in the year ahead.
Executives plan to shell out about $50 million per quarter through the end of the fiscal year. And even if the stock stagnates, one has to expect that the insiders will consider a deal from a private equity giant looking to secure these lucrative brands.
But the third reason to buy the stock is the most important...
Gap Inc. Has a Perfect Buy Signal
The Money Morning Stock VQScore is a proprietary rating system that tells investors when to buy a stock, when to hold a stock, and when to sell a stock.
The model incorporates a swath of fundamental and technical signals and assigns every profitable public company a rating from 1 to 4.9.
And Gap Brands currently has a 4.9 VQScore.
The combination of the holiday shopping season, the pending spin-off of Old Navy, the potential for a private equity deal for the firm's remaining brands, and the attractive yield and upside makes GPS a buy today.
Just how much could the stock break out in the year ahead?
GPS shares currently trade at $18.20 per share.
I believe the upside for this stock - especially if it went private - is $35 by the end of 2020.
That figure represents a potential upside of 92% in the year ahead.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.