Tax refunds may see modest upside. These stocks could benefit: Wolfe

A boost in this year’s tax refunds could bode well for a handful of stocks, according to Wolfe Research. The filing season for 2024’s tax returns starts on Monday. Wolfe anticipates flat to modestly higher tax refunds on a year-over-year basis, calling for “possible modest upside for lower incomes.” Factors behind the potential bump for tax refunds include the Internal Revenue Service’s move to expand the tax bracket thresholds by about 5% in 2024, along with a commensurate increase in the standard deduction, said Chris Senyek, chief investment strategist at Wolfe, in a Friday report. The IRS makes inflation adjustments to a slate of tax provisions every year. Further, lower- to middle-income taxpayer cohorts tend to see the largest total volume and highest frequency of tax refunds, Senyek added. The most sizable refunds arrive in mid-February due to rules around the timing of the payouts for the additional child tax credit and earned income tax credit, he said. This also means certain companies — or those with exposure to lower-end consumer spending trends — could see a boost if refunds come in higher, the strategist said. Here are a few names that are especially sensitive to tax refunds. Big-box retailer Walmart made it on Wolfe’s list. Shares are up 77% over the past 12 months. Earlier this week, Bank of America reiterated its buy rating on Walmart, hiking its price target by $5 to $110, pointing to “strong execution and a consumer that is ‘still buying.'” “WMT continues to see consumers being ‘consistent, discerning and price-conscious,’ and in some cases trading down,” wrote Bank of America analyst Robert Ohmes. The retailer’s appeal goes beyond lower-income cohorts, the analyst added. “As WMT’s strong value and convenience continue resonating with consumers, we expect share gains to continue across product categories and income cohorts (esp. households with annual incomes of $100K and beyond),” Ohmes said. In all, 40 of the 43 analysts covering Walmart rate it a buy or strong buy, according to LSEG. Consensus price targets call for nearly 6% upside from current levels. Wolfe also highlighted off-price retailer Ross Stores . Shares are up more than 7% over the past 12 months. Bank of America analyst Lorraine Hutchinson recently reiterated her buy rating on Ross, noting that it is trading at a discount to its peers and it is “most undervalued” heading into 2025. “ROST stock underperformed peers in 2024, up 10% vs BURL/TJX +46%/30%,” she wrote. “The multiple has contracted to 23x, a discount to BURL/TJX trading at 31x/27x currently.” “We think this dislocation in the multiple presents an attractive entry point for a retailer with strong fundamentals and share gain opportunities,” Hutchinson added. Wall Street largely agrees, with 13 out of 22 analysts rating it a buy or strong buy, according to LSEG. Consensus price targets suggest nearly 13% upside from current levels. Finally, discount retailer Five Below made it to Wolfe’s list. Shares have had a rocky ride over the past 12 months, down 48% during that period. Most of Wall Street is neutral on the stock, with 13 out of 24 analysts rating it a hold, per LSEG. Consensus price targets call for more than 26% upside. Wells Fargo has taken a shine to the name, however. Analyst Edward Kelly is overweight on Five Below, noting earlier this month that the company “delivered a better-than-feared holiday result as its turnaround continues.” “There is still work to be done, but easy compares, upcoming merchandise changes, improved store execution, and a new CEO point to a better ’25,” he added. “We continue to see the beginning of a turnaround that seems to have legs into ’25.”