Gap Inc. Stock Look Set For A Fresh Rally

A 5% jump on Thursday made shares of Gap Inc. (NYSE: GPS) among the best performing of US equities. It came off the back of a fairly sudden reversal from recent highs, which were set only earlier this month. But the 15% drop ran out of steam at yesterday’s open as a strong bid was present in the shares of the San Francisco headquartered retailer right through the close. 

It seems Wall Street isn’t willing to let Gap get too cheap for too long. They were arguably one of the stronger performing retail stocks last year as management performed an impressive pivot to digital channels in light of the COVID pandemic. For context, Gap shares were above their pre-COVID levels by early October and have run another 50% since then. 

Fresh Digital Channels

Investors clearly quickly bought into the post-pandemic recovery potential and this has only expanded as the global vaccine rollout has kicked off. Gap’s Q4 earnings from earlier this month confirmed as much. Revenue was down just 5% on the year which is more than a lot of non-retailer stocks can say, while EPS was comfortably in the black and well ahead of what analysts were expecting. 

This current dip, which yesterday helped reverse somewhat, could end up being a peach of a buying opportunity in hindsight if the economic reopening momentum continues at this pace. Wells Fargo has been running a monthly poll on consumer shopping behaviors and has identified a consistent theme of pent-up retail demand that’s likely to start coming to fruition by the end of Q2. They’re also seeing a permanent shift to online shopping, and as noted above, Gap have been among the leaders of those that made the pivot to digital. 

Wells Fargo’s recent price target update to Gap’s shares underlines the present opportunity; at $40, that suggests an upside of some 40% even after yesterday’s jump. In a note to clients earlier this month they highlighted the potential, noting there’s “a lot to like, see bull case building from here, stay long. With a solid 4Q print now behind us, we believe the bull case can continue to build from here. We continue to see an undervalued portfolio - led by Old Navy and Athleta (which by themselves should be valued at $35+ per share) - with a call option on the Gap brand (first positive comp in US in 4Q since 2017, Yeezy launch upcoming) potentially adding gravy to thesis."

Getting Involved

This is some solid sentiment to have behind you, especially when shares have just bounced off some solid support around the $27 mark. There’s every reason to think yesterday’s bid will continue into the weekend and unless fresh headwinds appear in the form of new restrictions, it’s hard to see Gap’s momentum going away anytime soon. 

They’re coming out of the pandemic stronger than when they went in, and while their financials are just about back to pre-pandemic levels it’s their longer-term potential that is vastly improved. This has been helped mostly by their emerging digital channels, and that’s the key factor for investors getting involved to be considering. The recent dip affords an interesting entry point and investors would do well to at the very least keep Gap on their watchlist.