The Daily Dose: Beware Retailers Stocks

 | Aug 11, 2014 | 10:00 AM EDT
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The financial websites lit up on Friday afternoon with headlines proclaiming a valiant gain for stocks amid a less aggressive-sounding Russia. It was almost as if any of the geopolitical fears baked into stocks earlier in the week were nothing to sweat, as the markets would shake off temporary bad news and make a strong upswing into the end of the year. Bankers rejoice.  However, I think there is still enough fear out there to suggest that Friday's move in stocks was just that: a move to fake everyone out not sophisticated enough to realize what the hell is going on in the world and corporate America. Where is that fear being concentrated? To me, it looks like it's in the Russell 2000 Index.

According to Bloomberg estimates, Russell 2000 companies are supposed to generate earnings that increase a hot 43% in 2014 compared to 2013. That outpaces the mere 12.2% profit growth being projected for S&P 500 companies. Yet, take a gander at the valuation that investors are willing to pay for the domestic -- and seemingly safe in a hell in a hand basket world -- growth that resides in the Russell 2000. The valuation is exorbitant, and suggests investors are simply buying "for the story" instead of the fundamental profiles of domestic businesses which, yes, will be impacted by geopolitical circumstances that do not appear set to diminish in the near term.

As long as this Russell 2000 trade stays on, be wary of comeback attempts on the S&P 500.  I would prefer to see the Russell 2000, as well as the suddenly-in-favor utilities, experience outflows before proclaiming an all-clear sign for the multinationals that are a little cheaper than a couple weeks ago.

Valuation: Russell 2000 vs. S&P 500

  • Source: Bloomberg


Russell 2000 Five-Day Performance vs. S&P 500

  • Source: Bloomberg

In terms of ridiculousness, here are one-month price moves for shares of your favorite department stores:

  • Kohl's (KSS): +7.01%
  • Macy's (M): +2.40%
  • J.C. Penney (JCP): +7.21%
  • Sears (SHLD): -1.4%
  • Nordstrom (JWN): +1.1%

I feel the performance of all these retailers, including the best-in-class Macy's, is overdone given the industry's elevated inventory levels, promotional intensity, and traffic trends during the second quarter. According to ShopperTrak, U.S. store traffic declined 3.5% year-over-year in the week ended August 2, led by an accelerated pace of decline for electronics retailers -- Best Buy (BBY) quarter. Traffic to apparel stores was also negative. But, also keep this fun fact in mind: as compiled by Bloomberg, four out of six department stores with a $2 billion market cap met lowered revised consensus forecasts in the first quarter, while Sears and Kohl's missed estimates. First-quarter gross margins declined an average 40 bps year over year. Next to no retailers have earned the right to be bought on anticipation of an earnings beat.

Be very careful in getting lured into buying relatively outperforming shares of retailers into earnings, it could end badly. I think what Gap (GPS) had to say last week regarding its July sales and second quarter EPS guidance, which triggered a pop in its stock, was company-specific.

More on JC Penney tomorrow morning.

ShopperTrak U.S. Retail Store Traffic

  • Source: Bloomberg



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