Things have not been easy for TJX Companies (TJX) lately. The shutdown of the US economy has led the retailer to temporarily close many of its locations across the country, and the measures have been extended to all stores recently. Even the company’s online platform has been out of commission, along with its distribution centers and offices.
This looks very much like worst-case scenario for any retailer, which helps to explain why TJX stock has been down 25% from its mid-February highs. Since the start of the broad market meltdown, shares have undeperformed not only the S&P 500 (SPY) but also the whole retail sector (XRT) by a couple of percentage points.
(Image Credit: TJX website home page on April 15)
While I don’t see good enough reasons for investors and traders to be optimistic about TJX’s near-term prospects, I also believe that the stock has been too severely discounted for how I expect the company to perform in the longer term. The bullish case, in my opinion, is easy to grasp – but the market seems laser-focused on the news of the day, missing the forest for the trees.
Good times, bad times
Let me start with the obvious: retailers tend to do well during periods of economic expansion and strong consumer spending. Should the global economy return to something that resembles a normal state, whether the turnaround takes two months or two years, TJX Companies should benefit from increased foot traffic and a robust pricing environment, as it has during the past several years.
The less obvious point is that off-price retailers, in particular, can also benefit, although maybe to a lesser extent, from a more challenging landscape. Should the novel coronavirus crisis lead to a deep and painful recession in which unemployment is high and incomes fall, quality products selling at a discount should be in high demand relative to full-priced merchandise.
The company’s consistent financial performance across good times and bad times can be easily observed in the graphs above. Over the past 30 years, through periods of economic expansion and three recessions, TJX’s sales have increased as smoothly as one could expect, in recurring-like fashion. Thanks in part to competent management, the top line stability has trickled down to operating income and free cash flow as well.
For this reason, despite being a retailer (on aggregate a pro-cyclical sector), TJX stock has outperformed the broad market during the past couple of recessions. In 2008-2009, the stock still endured a rough ride, but came out ahead in the end. In 2000-2003, TJX fared much better, but shares did not climb steadily through the broad market unwind. There, too, opportunities to buy the stock at lower valuations were unveiled.
(Source: D.M. Martins Research, using data from Yahoo Finance)
Buy and tuck away
I don’t think that TJX is a stock to buy and check back on price in a week. With all locations, distribution centers and online channel shut down for the next few days at least, the retailer is effectively a dormant business. The key macroeconomic indicators, from unemployment to consumer spending (as reported by large banks in the first few days of the 1Q20 earnings season), point in the bearish direction.
But I do believe that TJX is a stock to buy, tuck away inside a diversified equities portfolio, and forget about for the next few years. While I believe the business will do just fine going forward as it has in the past, come recession or economic expansion, valuations have reached 8- to 10-year lows in the last couple of weeks (see chart above).
Were I to invest in or add to my positions in the risky retail sector, I would probably do so from a place of strength. That being the case, a name like TJX quickly comes to mind, as well as others like Dollar General (DG) and Costco (COST).
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Disclosure: I am/we are long TJX, DG, COST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.