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Three stocks are worth buying ahead of this week's retail earnings wave, traders say

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Retail earnings on deck. What two traders are watching

The retail sector's roller-coaster ride continues.

A slew of major U.S. retailers is scheduled to report earnings this week after a worse-than-expected drop in domestic sales in April. Some of the companies in line to report are:

Investors looking to capitalize on any earnings moves might want to consider stocks that are already beating the market, Craig Johnson, senior technical research analyst at Piper Sandler, told CNBC's "Trading Nation" on Friday.

"You can clearly see that companies like Home Depot have definitely outperformed, Walmart has definitely outperformed and Target and Lowe's have outperformed on a relative basis versus the overall broader market," Johnson said. "Then you've got your store-based retailers like Kohl's and Urban Outfitters that have definitely lagged on a year-to-date basis."

"We're definitely going to be shaking out the winners and losers," he said.

Johnson's top pick was in the winners' camp.

"If you take a look at Home Depot, this stock is almost back to all-time new highs," he said, pointing to its chart.

"It has recovered very nicely off the lows, and I can just tell you from my own personal experience, I've spent a lot of time working on the yard this spring and, clearly, the neighbors are jealous," Johnson said.

"On the weaker side, take a look at the chart of Kohl's," he said. "The stock has moved up nicely off the lows but is still very far below its 200-day moving average and, clearly, there's a lot more time that's going to be necessary for Kohl's to recover."

"Kohl's is a name that I would be selling into strength here at this point in time and Home Depot would be one I'd be buying heading into the earnings front," Johnson said.

John Petrides, portfolio manager in the wealth division at Tocqueville Asset Management, was eyeing two other large-cap names heading into the week's reports.

"I think Walmart and Target are going to be really interesting," Petrides said in the same "Trading Nation" interview. "From a fundamental standpoint, these companies get about 50% of their sales from groceries, and we know that's where the majority of the consumer dollar has been going."

While he expected "a big move on the top line" for both companies, Petrides warned that their margins could narrow as operating costs tied to things such as home delivery rose.

"Three to five years ago, the market was writing off Target and Walmart because they said, 'Well, they're never going to be able to compete with Amazon,'" Petrides said. "Well, is Covid-19 and social distancing in the new world we live in the tipping point that now gets these guys into the game of e-commerce in a really, really strong way?"

On the losers' side, Petrides also suggested steering clear of Kohl's.

"Kohl's was a basket case coming into Covid-19. You see all the headlines of the department stores going out of business and Kohl's is as discretionary as they come," he said. "So, I think their earnings call is going to be really interesting to see, what is the uber-discretionary consumer doing in this environment and how is a Kohl's even faring and what [are] their future prospects going to be like?"

The SPDR S&P Retail ETF (XRT) is down almost 20% year to date. while the S&P 500 is down more than 11%.

Disclosure: Piper Sandler is a registered market maker for Amazon, Best Buy and Target. 

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