Has Ross Stores Stock Run Out Of Steam After Its 35% Rally?

Despite a 35% rise since the March 23 lows of this year, at the current price near $85 per share we believe Ross Stores stock (NASDAQ: ROST) has reached its near term potential. Ross stock has rallied from $63 to $85 off the recent bottom compared to the S&P which moved around 41% over the same time period. Lower discretionary spending, as well as lower demand for luxury goods, has led to the stock lagging overall markets. Moreover, the stock is up 8% from levels seen in early 2018, over two years ago. While the stock is well below the peak level it was at before the drop in February, it appears fairly priced as demand and revenues will be well below the figure last year. Our dashboard ‘Why Ross Stores Stock moved 8%?’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last 2 years is justified by the roughly 14% growth seen in Ross Stores’ revenues from $14.1 billion in 2017 to $16 billion in 2019. This combined with an 8.4% jump in net income margin from 9.6% in 2017 to 10.4% in 2019 and a reduction in share count due to stock repurchases worth $3.25 billion helped earnings per share surge 29%. Finally, Ross Stores’ P/E multiple jumped from about 22x at the end of 2017 to 25x at the end of 2019. The company’s P/E has now decreased to 18x, and while it may appear to be undervalued when compared to the P/E levels seen in the recent past (P/E of 25x at the end of 2019 and 22x as recent as late 2017), we believe the stock is fairly valued and is unlikely to see any upside keeping in mind the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting Ross Stores Stock?

The Coronavirus crisis has hit the apparel industry hard. Fading consumer demand reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed, continue to take their toll on the apparel industry. Ross Stores has faced the brunt of the outbreak of coronavirus with the company’s revenues shrinking by nearly 51% in Q1 2020 (ending April). However, Ross Stores has a well-diversified business, with the company’s product portfolio including ladieswear, home products, accessories, jewelry, children’s products, and others. Furthermore, the company has started re-opening its stores, which is likely to help the company’s revenues recover. Despite the recent store openings, Ross Stores’ revenues are likely to remain suppressed for at least a couple more quarters. Additionally, the ongoing unrest in the US will further impact the company’s revenues, as this is the company’s largest geographic segment.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to “look through” the current weak period and take a longer-term view,  with investors now mainly focusing their attention on 2021 results. 

While Ross Stores is looking stable, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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