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Top broker urging you to buy this ASX 200 retail stock next week

The retail sector is making a big comeback!

Consumer stocks outperformed the S&P/ASX 200 Index (Index:^AXJO) on Friday as the sector got a boost from the expected reopening of our economy from the COVID-19 pandemic.

We are likely to see a further re-rating of the consumer discretionary sector as the government’s three-step plan to loosen social restrictions over the coming months is implemented

The Wesfarmers Ltd (ASX: WES) share price jumped 2.9% to $37.45 while the JB Hi-Fi Limited (ASX: JBH) share price rallied 3.7% to $35.36.

One standout retailer

But it’s the Harvey Norman Holdings Limited (ASX: HVN) that is leading the charge with shares in the electrical and home furniture franchisor surging 6.7% to $3.03 yesterday.

Harvey Norman is getting an extra boost after Goldman Sachs upgraded the stock to “buy” on Friday, and the broker is forecasting further share price gains for the retail group.

“Industry feedback across listed and unlisted peers suggests sales trends and, to a lesser extent, profit conditions are proving more resilient across the sector than expected only a matter of months ago,” said Goldman Sachs.

“Despite the better than expected industry trends, HVN’s share price has not recovered from the March sell off, substantially underperforming the market by 15.5% since a recent high on February 19th.”

Improved outlook for retail

While it’s near impossible for anyone to confidently predict the outlook for FY21, Australia managed to contain the coronavirus outbreak better than many had feared.

A number of retailers have also delivered better than expected updates recently. This includes linen and homewares chain Adairs Ltd (ASX: ADH) and furniture retailer Nick Scali Limited (ASX: NCK).

The easing headwinds buffeting retailers prompted Goldman Sachs to upgrade its forecasts for the sector, and it won’t be the only broker taking a more favourable view to retail stocks.

Is Harvey Norman cheap?

“We forecast HVN is trading at 11.7x FY21 PE (50% discount to ASX200 Industrials), despite FY21 EPS being 16% below FY19,” said Goldman Sachs.

“On a property adjusted basis, we estimate HVN’s retail operations are trading at 3.0x PE in FY21.”

Goldman Sachs lifted its 12-month price target on Harvey Norman to $3.85 from $3.45 a share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.