Here's Why Big-Box Retailers Could Underperform in 2021

It's a market truism that the best-performers of the past year tend to underperform in the following year. This theory underpins the 'Dogs of the Dow' strategy which entails buying the worst-performing stocks of the past year in the Dow Jones Industrial Average at the start of the year.

So, there should be natural skepticism about strong performers when picking stocks especially when the calendar turns. One category that fits these parameters is big-box retailers such as Walmart (NYSE: WMT) and Target (NYSE: TGT). These stocks had massive runs in 2020 with gains of 44% and 121%, respectively to reach new, all-time highs.

Sell the News

While most businesses struggled during the coronavirus, these companies benefited. Since they were deemed as "exclusive businesses", they stayed open. They also saw a spike in sales during the initial period when people were stockpiling goods. The pandemic enabled them to accelerate ecommerce sales and build out a digital sales channel which should pay dividends in the future. At the same time, due to the stimulus, consumers had spending power, and many outlets for spending were unavailable leading to increased spending on technology, home improvement, and groceries.

Over the past six months, these stocks have remained in consolidation mode and now followed the market to new highs. This is noteworthy because the same conditions that catalyzed their gains a couple of quarters ago are now present. This includes additional stimulus, rising case counts, and restrictions on activity in so many areas.

2021 Outlooks

This reaction can be interpreted as the good news already being priced into the stock price, and investors are anticipating that intermediate-term results may disappoint relative to expectations. This could be likely as the coronavirus vaccine will lead to all sorts of coronavirus-trends being reversed at least for an initial period. This means that growth for these companies could flatline while spending at outlets that were depressed could see a big surge such as travel categories or specialty retailers.

Two more bearish factors for these stocks is that they will have tough comps due to acceleration in same-store sales and online sales during Q2 and Q3 of last year. Another issue is that Democrats are making the $15 minimum wage a centerpiece of their legislative agenda. This would likely push up wages at the lower end of the spectrum and decrease margins for companies like Walmart or Target.