By Sam Boughedda
In a note to investors discussing hardline, broadline and food retail stocks, UBS said its current top ideas in the sector are SPDR® SSgA Multi-Asset Real Return ETF (NYSE:RLY), Dollar General (NYSE:DG), Target (NYSE:TGT), Home Depot (NYSE:HD), and Floor & Decor Holdings (NYSE:FND).
UBS analysts said a comprehensive look at past cycles shows it's best to be selective with the sector, and right now, there are more questions than answers overhanging the investment debate on the food retail sector.
"Most likely, the uncertainties will keep these stocks hovering in a range for at least the near-term. The net takeaway from our analysis is that it's best to have a defensive posture for the next few months, but maintaining some offensive posture for the longer-term. As soon as the market sees a crest in the rise of rates, it will likely be a sign to switch to more cyclical exposure within the group. hus, our top ideas are: ORLY, DG, TGT, HD, and FND," they declared.
They also said earnings expectations need to be reset lower for many of the companies in the sector.
"Aside from a peak in rates, the other necessary condition for sustained outperformance of the stocks in this group is for estimates to be reset to levels that are perceived to be achievable," they added.
They acknowledged that there are different dynamics across the subsectors that comprise the sector, stating there's a good chance that the more defensive stocks like dollar stores and auto part retailers will continue to outperform in the near term. However, UBS believes there will be a point at which the broad group will "generate superior risk-adjusted return."