We're starting a new position in a stock that will benefit from retail's inventory glut

Published Wed, Aug 24 20222:20 PM EDTUpdated Wed, Aug 24 20222:34 PM EDT

We're initiating a position in off-price retailer TJX Companies (TJX), buying 350 shares at roughly $64.38 each. Following the Wednesday's purchase, TJX will represent about 0.75% of Jim Cramer's Charitable Trust, the portfolio we use the Investing Club. Off-price retailers tend to do best when there are disruptions in the supply chain and when retailers are flushed with inventory like they are now. When brand name merchandise starts to pile up and stores are forced to make room for new fashion and season trends, they are forced to mark down the excess and offload it to companies like TJX, which opportunistically pounce on the high-quality brands to sell it to customers at fire-sale prices. Part of TJX's business is apparel-focused, selling designer names and everyday brands for less through T.J. Maxx, Marshall's and Sierra stores. The company also operates home furnishings stores under the HomeGoods and HomeSense banners. The retailer offers a fun, treasure hunting experience for shoppers, thanks to its value prices of quality brands offered in its stores. TJX stock was not in our Bullpen, which we use as a watch list of names we're considering buying for the portfolio. However, we don't limit ourselves to just calling up Bullpen stocks, like we did with Starbucks (SBUX) on Monday. We're always on the look out for new companies to add and sometimes come across ideas while analyzing industry trends. Case in point: Back in June, we pointed TJX out as a winner from the inventory warnings of Walmart (WMT) and Target (TGT). Last week on "Mad Money," Jim highlighted it as what to buy to take advantage of the inventory glut that was evident as major retailers reported second-quarter earnings this month. We also discussed the stock on Wednesday's "Morning Meeting" for Club members, and how TJX can go to the full-price retailers with oversupply problems and get the pick of the litter. When you go over the conference calls at Target, Walmart, Macy's (M), Nordstrom (JWN), and many other retailers, it's clear this moment is nirvana for the off-price chains. Excess inventory has been a common theme throughout earning season. Retailers right now are working frantically to right-size inventory positions and discount items to get them out the door. Some companies are forced to get super promotional, and others have been scaling down future buying too. But a third component to fix inventory position is to sell to off-price chains, like what we described earlier. By the way, the part about taking less inventory for the future also helps these off-price chains. If a company like Target doesn't want this stuff anymore, but the makers of these products have already manufactured them, then the middlemen have to find another home for these products somewhere. While the off-price stores aren't their first choice — because these companies are cheap — in many cases, it's the only choice, because nobody else wants to buy in an inventory glut. So, right now, the off-price chains are getting an incredible opportunity to pick up all sorts of merchandise for next to nothing. But remember that's the long-term opportunity. It doesn't mean they're doing that great right now. Last week, TJX reported and the numbers were just so-so. The company's sales came in weaker than expected, with U.S. same-store sales down 5%, dragged down by HomeGoods. But their earnings came in a little higher than expected. Worse, TJX cut its full-year same-store sales forecast and slightly reduced its earnings forecast. When the market first digested the numbers, TJX shares opened lower. However, TJX shares closed the day higher, because management confirmed how great of a buying environment it is right now. On the call, CEO Ernie Herrman pointed out what we said earlier: "We are seeing extraordinary off-price buying opportunities in the marketplace and have no issues with overall availability. We are in a terrific inventory position, and we have plenty of open-to-buy to take advantage of the current environment. This allows us to offer even more exciting merchandise and value to our shoppers, which is our top priority every day." There are going to have tons of high quality products that they can sell at extremely low prices because they picked this stuff for next to nothing. "You need to think of TJX as a vulture: they're just waiting for other stores to keel over, then they can feast on the remains. You can practically hear them salivating for this marked down inventory that the big chains have no choice but to get rid of," Jim explained on "Mad Money. While same-store sales may have been ugly and the forecast for the current quarter wasn't great, on the conference call, management said their quarter-to-date same-store sales were tending in line with their guidance. That means the second quarter, the one they just reported, is likely the trough for these numbers and has us very bullish about the end of the year and the all-important holiday season. TJX Companies also returns cash to shareholders via dividends and buybacks. The current dividend yield is about 1.8%. Through the first half of its fiscal 2023, the company has repurchased a total of $1.3 billion of stock, retiring 21.4 million shares. The company expects to repurchase approximately $2.25 billion to $2.5 billion of stock in fiscal 2023. That leaves about $1 billion for the current quarter and the next. The company's current market capitalization is nearly $76 billion. We are initiating our TJX position with a price target of $74 per share (about 15% higher than current levels), representing roughly 21x fiscal year 2024 earnings estimates of $3.50, which represents growth from the $3.10 the company is estimated to earn in fiscal year 2023 (it's current year). We think this multiple is very reasonable given the fact the 5-year average on the next 12-month earnings is about 22x. Still, we plan to start relatively small in TJX to leave plenty of room to scale into the position over time on broader market weakness. We note that off-price peer Burlington Stores (BURL) is scheduled to report earnings Thursday morning before the opening bell. Since the group tends to get lumped together, we expect TJX will trade off that quarter, for better or for worse. Either way, we are not making a call on the BURL number as TJX is the superior operator in the group and this is a long-term investment, not a trade. (Jim Cramer's Charitable Trust will be long TJX following this trade. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Annapolis, Maryland, on May 16, 2022

Jim Watson | AFP | Getty Images