Bottom-fishing for exceptional businesses is a great strategy if done carefully, but there is a less popular strategy that also works great. Trend followers employ this strategy, and its goal is to buy stocks that are making new highs – especially during bear markets.
The rationale behind this strategy is that if a stock can give up ground grudgingly in a challenging market environment with heavy selling pressure, it is like a beach ball being held underwater.
Once the weight of the general market comes off and the market exits its bull markets, these stocks often see their rate of change double with no forces holding them down, often more than doubling in price.
For one retail company, it fits this bill and also has strong fundamentals.
A Steady Retail Growth Story At A Reasonable Price
BJ’s Wholesale (BJ) is a $9.5 billion membership-only warehouse company in the Retail Sector that has a similar business model to Costco (COST) and Sam’s Club. It currently operates 230 clubs across the United States but benefits from considerably more whitespace, more SKUs across fresh and deli (improved selection in grocery), and smaller pack sizes.
This makes it a highly attractive option for consumers looking to save money without buying in massive bulk formats.
As importantly, it has a superior investment thesis for a recessionary environment, benefiting from a staples tilt (Gas, Grocery, Baby & Kids, Pets) that complements its discretionary segments (Patio/Outdoor, Furniture, TV & Electronics).
BJ’s reported Q1 2022 revenue of $4.49 billion (+16% year-over-year) and has easily lapped the difficult pandemic comparables where there was a surge in demand due to pantry stocking and fear of continued lockdowns.
Meanwhile, quarterly earnings per share improved to $0.87, up 21% from the year-ago period.
One of the most compelling reasons to buy BJ’s right now is its steady earnings per share growth (45% CAGR 2016 – 2023 estimates), accelerating unit growth, and desirable positioning in a recessionary environment.
As noted by the company, it is increasing its store openings, opening three new clubs already this year and 11 clubs for the next two years (up from five in 2021). This ramp-up is related to the strong performance of new stores, which are tracking at above-average volumes to date despite a backdrop with a weaker average consumer.
Just as importantly, BJ’s membership-based model has a lower proportion of less affluent customers that are members, meaning that it should see less impact from a recessionary environment.
However, it continues to trial its store for new customers to boost its store count, offering massive savings in its newly announced WOW sales event that should boost Q3 sales.
Hence, I am bullish not only on net sales but long-term customer acquisition (same-store sales) with BJ’s strong business model that offers value in a time when customers are looking for it more than ever.
The Fundamental Case
BJ’s trades well behind its closest competitor from a valuation standpoint at ~19x FY2023 earnings estimates vs. Costco at ~39x earnings. This is despite higher long-term growth potential for BJ’s, given its less mature business model (whitespace).
On a PEG basis, the stock trades at a very attractive valuation of 1.06 despite modeling a conservative growth rate of 18%.
The Technical Picture
From a technical standpoint, BJ’s could not be more attractive, making a new all-time weekly closing high last week and working on breaking out of an 8-month base.
The stock trades above a rising 10-week and 20-week moving average, leaving momentum to the upside, and saw a massive accumulation bar last month, with the stock up 12% for the week on more than three times its average weekly volume (24 million shares).
This extreme relative strength vs. the market suggests higher prices are on deck.
The Bottom Line
Based on BJ’s FY2023 annual EPS estimates of $3.70 and a fair multiple of 26x earnings (33% discount to Costco, the industry leader), I see a fair value for the stock of $96.20, translating to a 35% upside from its current levels.
This makes the stock highly attractive from both a technical and fundamental standpoint, and I would view any weakness as a buying opportunity.
Disclosure: I am long BJ
The above analysis of BJ’s Wholesale (BJ) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is BJ’s Wholesale (BJ) A Buy or Sell?
Based on MarketClub’s technical analysis tools, BJ’s Wholesale (BJ) is in a strong uptrend that is likely to continue. While BJ is showing intraday weakness, it remains in the confines of a bullish trend. Traders should use caution and utilize a stop order.
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