This article will examine the best retail stocks to buy in the current market. Retail stocks have undergone a very traumatic decline over the past few years, as online competition continues to grow, and Amazon.com has become the 800-pound gorilla in the space.

Nevertheless, some retail stocks remain resilient, and have even sold off to the point that they may represent a long-term value. Some retail stocks pay modest dividends as well.

The best retail stocks are best suited for very long-term investors seeking capital appreciation, but who also understand the significant risks surrounding them. Most notably, investors need to be aware that there is a great deal of volatility associated with clothing retail stocks.

Should you invest?

The 3 Best Retail Stocks

If you’re in a hurry, below are our top picks for retails stocks as of this writing.

1. Amazon: The most dominant retail force in stock market history.
2. Home Depot: The leading name in the home improvement sector.
3. Best Buy: A survivor who learned how to disrupt.

Keep on reading to learn about these companies and my thoughts on each.

What Are Retail Stocks?

Retail stocks represent a class of companies that sell goods to consumers. These goods can represent everything from clothing to home-improvement items to everyday items.

Retail stocks also run the gamut as far as their individual growth rates. There are some classic retail names that have fallen on hard times, and whose sales are declining year-over-year, and are being forced to restructure their business.

The best retail stocks have managed to hold their own, as management has had the foresight to restructure and reinvigorate their businesses as competition has grown over the years.

Some of the other best retail stocks continue to do very well, and enjoy strong growth, because they offer certain goods that consumers need on a regular basis. These retailers also tend to have a very large presence, and have a long track record of crushing smaller competition.

Finally, there are disruptors that have figured out a business model that allows them to grow very rapidly, while change in the entire retail dynamic in the marketplace.

One set of retail stocks that investors must be very cautious with, as mentioned above, are clothing retailers. The market is littered with retail stocks of clothing companies that burst onto the scene, saw their stock skyrocket, only to crash back down-to-earth when demand waned.

That’s because consumers can be very fickle. What may be hot one moment will not be hot the next. Consequently clothing retail stocks tend to have very high risk and very high reward.

How Do You Determine What Qualifies As The Top Retail Stocks?

When it comes to the best retail stocks, they all have several things in common.

First, best retail stocks have a world-class brand name. That means they represent a company whose products or services are known for being exceptional. For that to be the case, the best retail stocks very likely have a multi-decade history. It does not mean the company is necessarily known all over the world.

Second, the best retail stocks are growing earnings at an annual rate of at least 7%.

Stocks like these, that are growing earnings in the high single digit range over many years, are what legendary investor Peter Lynch called “stalwarts”. They are solid stocks with predictable earnings and cash flow.

Third, the best retail stocks have a solid track record of generating significant positive free cash flow.

Fourth, as a result of all of these other characteristics, the best retail stocks have something special about them that distinguishes them from all the other competition.

It may be great customer service. It may be a line of clothing or footwear that is constantly being redesigned to keep up with the latest trends. It could be an unbeatable physical footprint.

Or it may simply be visionary management that creates a holistic approach to running the business that cannot be matched.

Here is a video that offers more information on how to invest in retail stocks.

Amazon.com Inc.

What is it?

Amazon.com began as an online seller of books in 1994. Since then, however, it has become the most dominant online retail company in North America and quite possibly, the world.

Although it is best known as a retailer, it is also started to manufacture its own goods with its own brand name. It is also a producer of streaming video content.

In addition, it is also known for AWS, the software/cloud service known as Amazon Web services. While some may argue that this places it in the category of a technology stock, AWS does not yet make up the bulk of Amazon.com’s revenue.

Why is it a good stock?

Amazon.com has all the characteristics mentioned above that place it in the category of being one of the best retail stocks.

First, Amazon.com definitely has a world-class brand name. Even though Amazon only currently sells goods in 10 countries, and has fulfillment centers in 13 countries, its presence is so dominant and its impact so significant, that consumers naturally associate the company with the leader in online retail.

Second, when it comes to earnings growth, Amazon.com is kind of a special case. The company generates so much revenue, and its management is so confident in its approach, that it is able to divert its revenue into earnings at whim.

Amazon.com does not have management that plays to Wall Street’s insistence on regular earnings growth.

Its most recent earnings report showed earnings-per-share $5.75 versus an expectation of $3.14. Revenue was $56.6 billion, coming in about a half-billion dollars short of analysts’ expectations. Nevertheless, this was a 30% year-over-year increase in revenue.

Over the trailing 12 months, Amazon has generated an incredible $221 billion in revenue, leading to about $8.9 billion in net income.

Analysts forecast as much as 44% annualized earnings growth over the next five years.

Third, Amazon has generated $11.8 billion in free cash flow over the trailing 12 months. Over the past four full fiscal years that free cash flow has exploded, beginning from about $2 billion in fiscal year 2014.

Fourth, Amazon.com certainly has that special something that distinguishes it from all other retail stocks. The visionary management of Jeff Bezos has catapulted Amazon.com into the category of best retail stocks.

Read Also: Amazon Stock Prediction

Home Depot Inc.

What is it?

Home Depot is one of the world’s largest home improvement retailers. With about 2000 stores in the United States alone, and another 300 and other parts of North America, Home Depot has become a true category killer.

Why is it a good stock?

First, Home Depot certainly has a world-class brand name that makes it one of the best retail stocks. Stop any person on the street and asked him to name a home improvement store. They will either mention Home Depot or Lowe’s.

People know that, if they need to buy anything involving home-improvement, Home Depot is going to carry it. It is also very likely Home Depot will have the lowest price.

Second, analysts’ peg annualized earnings growth rate for Home Depot at about 14%. This is an astonishing growth rate for company that is been around as long as Home Depot has.

The earnings growth is driven by same-store sales. Home Depot, in its second-quarter report, revealed that its same-store sales were 8%. Most retailers are lucky to achieve 3%.

Third, Home Depot has always generated significant free cash flow. Home Depot generated about $6.8 billion in free cash flow in fiscal year 2014, and has generated approximately $10 billion in free cash flow over the trailing 12 months.

Fourth, Home Depot has an incredible physical footprint. It store based in the United States alone makes it very difficult to compete against.

Best Buy Co., Inc.

What is it?

Best Buy is a retailer of both technology products and services, with roughly 1500 stores throughout North America.

Why is it a good stock?

While it is arguable as to whether or not Best Buy is truly a world-class brand name among consumers, it certainly is a familiar name to many, and when people think of the types of products that it sells, Best Buy is one of the first names that will come to mind. That is the first reason it qualifies as one of the best retail stocks.

Second, Best Buy is expected to grow earnings at an annualized rate of about 14%. This, however, in the face of competition from other department stores, online retailers, and Amazon.com, is one of the things that makes Best Buy one of the top retail stocks.

It is no small feat to generate this kind of robust earnings growth in this environment.

Third, Best Buy generates reliable free cash flow. In fiscal year 2014, it generated about $1.39 billion of free cash flow. In the trailing 12 months, free cash flow is $1.8 billion.

Fourth, there is definitely something special about Best Buy. A number of years ago, as competitors like the Circuit City were going bankrupt Best Buy was struggling. Yet, visionary management stepped in and reorganize the business and to not simply being a retailer but also a service provider, providing services very similar to those of the Genius Bar at Apple.

Read Also: What’re the best dividend stocks?