MCD - 7 Undervalued Retail Stocks to Buy Now

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There are many undervalued retail stocks to buy now. The S&P 500 has fallen nearly 17% year-to-date and serves as a reasonable proxy for the overall economy.

Meanwhile, the SPDR S&P Retail ETF (NYSEARCA:XRT), a reasonable proxy for the retail sector, has declined by a much higher 28.31% during the same period.   

The bad news is that retail has suffered as consumer trepidation and fear increase at the prospect of a recession or worse.

The good news, though, is that many of those retail stocks have been the victim of unduly steep reductions in price. That means that there are deals to be had on these undervalued retail stocks. 

MercadoLibre (MELI)

MercadoLibre (NASDAQ:MELI) has developed a reputation as an Amazon (NASDAQ:AMZN) for the region.

That has served it well and along with its growing business, resulting in massive upside based on Wall Street opinions. Its average target price of $1,275 is well above the $960 it currently trades at, making it one of the undervalued retail stocks to buy now. 

That’s the broad bullish argument in favor of MercadoLibre as an undervalued retail stock. At the same time, investors can cherry-pick certain value metrics and come to the opposite conclusion.

For example, MELI stock carries P/E and P/B ratios (price to earnings and price to book) that are worse than 97% and 91% of the retail cyclical sector. Those metrics seemingly indicate that MercadoLibre is overpriced, not undervalued. 

But it’s the growth of the firm that negates that argument. MercadoLibre boasts a 3-year EBITDA growth rate of 154%. That’s better than almost any of its competitors and shows why it is often described as the Amazon of Latin America. 

Arcos Dorados (ARCO)

Arcos Dorados (NYSE:ARCO) means golden arches in Spanish so it should be no surprise that the stock is related to McDonalds (NYSE:MCD).

Arcos Dorados operates and franchises Mcdonald’s restaurants throughout the entirety of South America and Latin America. 

It is ranked better than roughly 76% of restaurants by P/E ratio. The company has a median P/E ratio of 25.44 over the past 10 years. Its current P/E ratio is 13.33.

That comparison suggests that investor capital should logically flow back into ARCO shares once cyclicality turns in favor of retail. In other words, a buy-and-hold investor could expect that ARCO shares will move up in price as business cycles follow their well-worn patterns. That will require patience, but that’s what investing is about. 

Analysts expect the company’s revenues to grow faster than two-thirds of its competitors over the next three to five years suggesting it’s one of the undervalued retail stocks with a long runway.

Pinduoduo (PDD)

Pinduoduo (NASDAQ:PDD) is a stock in the Chinese eCommerce firm that looks quite strong based on multiple fundamentals. It also has more than $20 of upside beyond its current price of $65, making it one of the undervalued retail stocks to keep your eyeon. 

In my opinion, what really jumps off the page regarding Pinduoduo is just how good the company is at investing capital into its business. I repeatedly come back to the comparison between return on invested capital versus the weighted average cost of capital when analyzing firms.

In short, if a company’s ROIC exceeds its WACC then it is said to be value-creating. Such companies invest capital at WACC and get returns on that investment. The invested capital is really equities and bonds meaning the cash investors provide. 

And Pinduoduo is excellent by this measure. Its ROIC of 52.97% is much higher than its WACC of 9.54%

That was a long-winded explanation but it is important because it strongly suggests that Pinduoduo is very effective with investor capital. That should lead to massive value over time. 

Coupang (CPNG)

Coupang (NYSE:CPNG) stock will continue to fluctuate wildly as markets digest positive inflation news. That led to CPNG stock rising more than 15% when October CPI numbers were released.

It fell by 5% the next day, but that volatility is more a reflection of the markets overall than it is a reflection of Coupang’s prospects. In fact, Coupang’s prospects are looking a lot stronger as the firm moves into the black. 

That’s the point here. Coupang has long been plagued by the fact that the Korean eCommerce platform continued to lose money. Investors were interested in the growth of the company but those losses were enough to keep investors at arm’s length. 

Those same investors can breathe a bit easier now. Coupang posted a net income of $91 million in the most recent quarter. That represented a massive turnaround over the $324 million loss it suffered a year earlier during the same period.

Coupang’s revenues increased 27%, reaching $5.1 billion as well. Those strong sales and profitability make CPNG worthwhile. 

Ulta Beauty (ULTA)

I’ve mentioned Ulta Beauty (NASDAQ:ULTA) several times in the previous months. Each time I’ve done so, it’s been for the same reasons. The beauty product retailer is a strong business that has strong tailwinds in its favor. That is the same reason that I continue to recommend purchasing Ulta Beauty. 

The markets responded positively to October CPI numbers. The slight beat caused jubilation sending prices much higher momentarily. Then the hangover ensued the day after and prices dropped. 

For Ulta Beauty, that’s a good sign. It benefits from the so-called ‘Lipstick Effect’ which indicates that consumers spend more on small luxuries like expensive lipstick during weak economic periods. 

Like Pinduoduo, Ulta Beauty boasts strong value creation with an ROIC of 32.73% and a WACC of 11.68%. Ulta Beauty is also very profitable and boasts strong margins and revenues that have grown at an average of 12.1% over the past three years. 

O’Reilly Automotive (ORLY)

O’Reilly Automotive (NASDAQ:ORLY) stock represents the retail of auto parts and has moderate upside based on its average target price.

The company is performing well with comparable store sales that increased 7.6% in Q3. That correlated to a three-year stacked sales increase of 31.2%. Roughly speaking, that means O’Reilly’s established stores continue to grow at a healthy rate. 

That resulted in an earnings increase of 14% during the same period. All of the positive results are part of a greater trend. Americans are holding onto their vehicles for longer than ever and the average age of U.S. vehicles is higher than ever. Sedans and coupes are more than 13 years old on average and trucks more than 11. That was a new high. 

The result is that these older vehicles require more repairs, sending more customers through O’Reilly’s doors. My guess is that consumers have little reason to buy newer vehicles any time soon. The economy remains in a tight spot and a recession looks as likely as ever. So, ORLY stock has at least a few strong quarters ahead. 

Driven Brands (DRVN)

Driven Brands (NASDAQ:DRVN) stock illustrates the difficulty in understanding investor sentiment. The automotive services firm should likely be trading higher than it is. 

The company reported strong earnings on Oct. 26 with revenues up 39%, operating profits up 50%, and net income of $38.4 million. The strong results allowed the company to increase its full-year 2022 guidance upward, a strong signal. 

But DRVN stock continues to trade near $31, well below its average target price of $40. That’s why it looks like a bargain. Driven Brands relies on similar trends that benefit O’Reilly.

The company is the largest automotive services firm in North America. It does repairs, collision, glass replacement, oil changes, and everything else that older vehicles require in greater quantities. 

In short, it looks likely that DRVN stock will have at least a few strong quarters ahead. The 30% upside baked into its target price makes it a relatively easy pick with undeniably strong trends in its favor moving forward. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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