Retail’s Comeback: 3 High-ROIC Stocks That Could Outshine AI

Key Points

• The retail sector's discount has made three stocks stand out as potential wealth compounders due to their high returns on capital and profitability.
• Institutional capital is already acting on this opportunity, and some Wall Street analysts already call for double-digit upside.
• Short sellers are easing off these retail stocks, suggesting growing confidence in their fundamentals and the potential for near-term price rebounds.

It’s no secret that the retail sector is now one of the most forgotten areas of the market, whether it is because artificial intelligence (AI) names have taken the bulk of the attention—and capital—in the entire industry, or whether ongoing trade tariff negotiations have pushed investors away from this space in fear of further volatility and uncertainty.

The truth is, there are some hidden opportunities with the potential to create the sort of wealth-compounding effects that every investor would love to have in their portfolio, especially considering how inflation and valuation uncertainty have affected the market and economy. 

Best Buy Inc. NYSE: BBY, Lululemon Athletica Inc. NASDAQ: LULU, and Bath & Body Works Inc. NYSE: BBWI are ideal candidates for multi-year runs and expansion in market capitalization. Why? They each boast strong profitability and the ability to reinvest earnings at high rates.

Best Buy: A Brick-and-Mortar Winner

Many consumers—and investors—would likely pass on Best Buy in favor of Amazon.com Inc. NASDAQ: AMZN and other online retailers that offer a wider selection of products and often better prices. 

Best Buy knows this, and it is one reason why it is quickly pivoting its inventory exposure to include items that customers wouldn’t usually buy online. The company hopes to capitalize on the value of an in-person with appliances, high-end electronics, and smart home devices that consumers want to see, touch, and understand before purchasing. In-store staff provide hands-on education, and showrooms allow consumers to test products, enhancing customer satisfaction and protecting pricing power and brand loyalty.

This strategy should enable Best Buy to remain one of the few standing brick-and-mortar retailers still generating sufficient profits. The company's ROIC is hovering around 20%, well above the company’s cost of capital. This matters because annual stock price performance tends to align with the long-term ROIC rate over time, meaning there is sufficient market share and pricing power in the company’s brand to sustain business profitability for the foreseeable future.

All this considered, Best Buy is positioned to continue delivering strong performance, especially as many of its peers struggle to adapt.

Lululemon: A Tariff-Induced Buying Opportunity

Lululemon's story is one of short-term pain but long-term potential.

After President Trump announced a wave of tariffs targeting most of the Asian countries from which the United States sources its apparel materials, Lululemon shares sold off significantly, trading at a dismal 53% of their 52-week high levels. This created a massive gap to be filled on the upside.

While the headlines spooked retail investors, institutional sentiment tells a different story: the risk-to-reward ratio now favors the buyers. Over the past month, Lululemon’s short interest has declined by over 4%, showing some signs of bearish capitulation and a new path for higher prices.

Major institutional investors have already taken action on this setup opportunity. For example, Robeco Institutional Asset Management significantly increased its holdings by as much as 55%, bringing its position to nearly $60 million.

This aligns with Wall Street analysts issuing a consensus price target of $335.9 for LULU stock, implying the company can rally by as much as 50% from its current trading price. And that is not even assuming it will retest its previous 52-week highs.

At the core of this buy-the-dip thesis is the company’s ROIC, which sits around 29%, confirming Lululemon's ability to maintain high margins and strong brand value, even during challenging macro periods. For long-term investors, the recent sell-off may be a gift.

Bath & Body Works: Earnings Power Meets Capital Efficiency

Wall Street analysts forecast that Bath & Body Works could generate up to $2.08 in earnings per share (EPS) for the fourth quarter of 2025, a massive jump from today’s reported 49-cent EPS. As most investors already know, stock price action typically follows EPS growth, but the story goes deeper than that.

Bath & Body Works also generates up to 29.5% in ROIC, meaning that this brand recognition and market share could allow the company to compound on its value and deliver outsized returns, following the Best Buy model of capitalizing on the in-person shopping experience.

Bath & Body Works thrives on sensory-based shopping, selling products customers want to see, smell, and feel before buying. The brand has cultivated deep consumer loyalty and continues to drive innovation in fragrance, skincare, and home products.

Institutional buyers have taken note, with OLD National Bancorp recently boosting its stake by 8.5%, bringing its total holding to over $11 million. This quiet vote of confidence is worth paying attention to, especially with the stock trading at relatively low multiples compared to its historical averages.

In addition, the recent appointment of Daniel Heaf, a former Nike executive, as CEO further signals a shift toward operational excellence and modern retail strategy and could drive future profitability even higher.