Oil Drop Boosts Retail Trio

11/17/2014 8:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

There are notable winners for lower oil prices and the bigger winner might just be retailers, suggests Marshall Hargrave in Daily Profit.

Gas prices are below $3 a gallon, on average, and at the lowest levels in over four years. They've fallen nearly 40 cents a gallon over the last month.

That means consumers will have more money in their wallets in coming months. Add to that an improving employment picture and retailers could have strong tailwinds heading into the holiday shopping season.

Here are three retailers that are positioned to benefit from lower gas prices:

TJX Companies (TJX)

TJX is a leading off-price retailer, operating the TJ Maxx, Marshalls, and HomeGoods stores in the US. Shares are flat year-to-date, but it's one of the best investments in the retail space. It offers a 1.1% dividend yield and its return on investment is a very solid 39%.

TJX has been one of the biggest benefactors of the increased demand for low-priced goods. The shift from high-end to low-end products appears to be working as TJX's business model of offering trendy products at discounted prices is resonating with millennials.

Dillard's (DDS)

Dillard's is a department store retailer of apparel and home furnishings, operating some 300 stores. It's an underrated retailer with a strong brick-and-mortar business and e-commerce platform.

Its stores are now offering more on-trend products. The company has remodeled a number of stores over the past couple years; they are sure to attract more shoppers this holiday season.

Dillard's trades at a P/E ratio of 15. Coupled with Wall Street's expected earnings growth, its P/E-to-growth rate (PEG) ratio is right at 1. Any PEG ratio at or below 1.0 is considered a cheap stock.
                       
Dillard's is also a free-cash-flow story, generating near $10 a share in free cash flow over the last 12 months. Thus, Dillard's could be an even more shareholder-friendly company going forward.

J.C. Penney (JCP)

J.C. Penney is a risky play. It's a turnaround story and has a debt-to-equity ratio of 210%. The stock is down 17% year-to-date and has fallen over 90% from its 2007 all-time highs.

The company recently brought in Marvin Ellison as CEO. Ellison previously worked at Home Depot and has had success in boosting IT infrastructure and revamping distribution networks.

For near-term catalysts, J.C. Penney is still a major seller of national and private label brands and has been aggressively investing in point-of-sale technology to help make the buying process easier and more fluent.

J.C. Penney has also been effective at trying to get younger shoppers in its stores by opening more Sephora store-in-a-stores. With a new advertising campaign, this retailer could look to recapture some of its lost market share come this holiday season.

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