There’s one retail name that made Josh Brown’s Best Stocks list that caught him by surprise
(This is The Best Stocks in the Market , brought to you by Josh Brown and Sean Russo of Ritholtz Wealth Management.) Josh — On Thursdays, we use this column to highlight a single name. We try to talk about new ones you haven’t seen us talking about before. Today’s subject came as a surprise to me. When Sean showed me Williams-Sonoma making it to the Best Stocks in the Market list I was like, “no way.” These days, the market is awash in retailers and consumer plays that are leaking market cap as every investment dollar races out into the AI trade. Plus! WSM has a tinge of housing market exposure, which is like being adjacent to a leather tannery or downwind of a sewage treatment plant. Just a noxious river of sludge and foul wind enveloping everything in the vicinity. And yet, against all odds, this stock is working. I demanded to know why. We found out and now you get to find out too… Best Stock Spotlight: Williams-Sonoma, Inc. (WSM) Sean — One of my favorite things as an analyst is identifying stocks doing very well in a sector/industry that is doing very poorly. It’s not an ironclad rule of finance (because those don’t exist), but oftentimes stocks that look strong in bad environments signal quality in fundamentals, management and price. It’s foundational to the momentum factor — stocks that go up tend to go up, and vice versa. Check out this alligator jaw chart. The Dow Jones Specialty Retailers Index (think WSM, Autozone, Dicks Sporting goods, RH, Ulta, etc) is cratering, while WSM makes new highs. Let’s dig into what’s happening here. In fiscal Q2, the company reported revenue of $1.96B, up 6.7%, and comparable brand revenue accelerated to 6.2% from 4.8% in Q1. Every brand posted a positive comp (they own Pottery Barn, West Elm, Rejuvenation and its namesake cookware brand). CFO Jeff Howie noted that the home furnishings industry was essentially flat in the quarter. That means effectively all of WSM’s growth was market share gain relative to everyone else. WSM has been one of the more aggressive retailers putting AI in front of customers. “Olive” is the AI shopping assistant on the Williams-Sonoma site. Since the start of the year, engagement with Olive is up 700% and revenue tied to it is up 620%, and customers who use it convert at 3x the rate, according to WSM management. In August, WSM launched Otto, a furniture-focused version for the Pottery Barn brands that coordinates pieces room by room. Over 70% of Otto’s conversations are resolved without intervention from a human. Personalized site visits now generate roughly 9x the revenue of an average visit, up from 2x last year. AI is having a real effect on this business. The less flashy growth engine for WSM is its business-to-business segment. B2B grew 14.5% in Q2, its largest volume quarter to date, with “Contracts” up 20%. Contract is the side that furnishes hotels, restaurants, multifamily buildings, senior living and even cruise ships. Projects closed in the quarter included the Virgin Hotels in New York City and the Hardin House at the University of Texas at Austin. The CFO reiterated a path to $2B in B2B revenue over the next several years, in what he described as an $80B fragmented market. Looking forward, management raised both ends of its full-year guidance. Comparable brand revenue growth is now 4% to 6.5%, up from 2% to 6%, which equals total revenue growth of 4.7% to 7.2%. Operating margin guidance is now 17.8% to 18.2%, up from 17.5% to 18.1%. That guidance still doesn’t assume a housing recovery either. Management reiterated its long-term goal of mid-to-high single digit revenue growth with mid-to-high teens operating margins. Store count is set to grow 1% to 3% a year starting in fiscal 2027. Things are going well over at WSM, hence the price performance. Risk management Josh — I like the story, but the set-up isn’t fully baked yet. I don’t completely trust this stock until it breaks resistance. It’s in one of the most challenged industry groups (specialty retail) within one of the toughest sectors (Consumer Discresh) and that’s a lot of headwind. Does a strong stock overwhelm the weakness of its sector? Sometimes but not forever. We don’t know how the divergence Sean points out is going to resolve. Until we do, I’d risk a half position at most. Williams-Sonoma spent most of the past year chopping between $165 and $220 with no real direction. That changed in late May, when the stock ripped off the low on heavy volume and ran to $245 by June. The July pullback held above $213, and the August high came in near $252. September was a tight range between $217 and $235, with the stock stuck under its 50-day for most of it. This week it broke out of that box. The stock is now $242, with the 50-day at $234 and the 200-day rising at $210. Resistance is the $245 to $252 zone that turned the stock back in June and again in August. A convincing close above $252 is where the rest of the position goes on. I know they taught you in elementary school to buy low. They didn’t know anything about the stock market. Buy or add on the breakout. With RSI at 64, momentum is turning back up alongside price. The September range washed RSI down to about 40 without any damage to the chart. Momentum cooled off while the stock held its ground, which is exactly what you want from a consolidation after a run like the one in June. Now it gets a shot at the August high without starting from a stretched reading. Traders can use $230 as their stop. That’s the top of the September range, the ceiling the stock just broke through. A close back below it means the breakout didn’t take and the stock is back in the box. The stock will tell you quickly whether you’re right. Judge it on the close, not the intraday swings. Investors can anchor to $215. The July low and the September lows both came in right around there, two tests of the same spot, with the rising 200-day at $210 sitting just underneath. Below that on a weekly close and the uptrend that started in May has failed. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. 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