Two Big-Cap Retailers Break Away

 | Nov 15, 2012 | 11:30 AM EST
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The market meltdown, along with some disappointing earnings reports, dragged down a number of large-cap retail-sector names. In addition, many former leaders have fallen from grace.

Ross Stores (ROST), which had a solid yearlong rally, has essentially been in free-fall since topping out at $70.82 on Aug. 20. Whole Foods (WFMI), another stock with a lengthy track of price growth, is down 7.1% this month and sliced its 200-day line in above-average volume Wednesday.

There is some clear divergence taking shape between various sub-sectors. Among DJIA components, Home Depot (HD) rallied to a multiyear high this week, while McDonald's (MCD) is down 15.7% year-to-date, closing at $84.62 Friday.

But Home Depot is not the only big-cap retail name outpacing the benchmark index by a wide margin. For example, rival Lowe's (LOW) rallied to a multiyear high earlier this month and is not holding between its 10-week line and a prior peak of $33.63.

I was scanning my list of the technical leaders among the big-cap retailers, and it struck me that apparel and accessory companies were well represented. Gap (GPS) delivers third-quarter results after the close Thursday. Heading into that report, the stock was up more than 81% year-to-date; however, it's been pulling back since September -- not surprising after a gain of 21.5% in August following its second-quarter report. Shares closed Wednesday at $33.63, 6% below its 50-day line but 14% above its 200-day average.

This is a turnaround in the earnings department; these situations often result in significant price gains, as well. The return on equity is strong at 24%; however, free cash flow per share has declined in each of the past two years. When the company reports later today, analysts expect earnings to come in at $0.63 per share on revenue of $3.82 billion. Those would be gains over the year-ago quarter.

Another large-cap retailer whose chart remains strong is sunglass-market dominator Luxottica (LUX). The fiscal cliff and European debt crisis don't matter -- people want to protect their peepers and look stylish doing it. For a large-cap, Luxottica has a rather high beta of 1.22. A glance at Luxottica's daily chart, however, shows a phenomenon that's not uncommon for American Depositary Receipts: an unusual number of intraday gaps higher and lower. These are due to currency exchange rates. That contributes to a somewhat high beta on many ADRs, even though the given stock appears to trade smoothly on a weekly chart. In any case, the stock has been trending nicely along its 10-week average, and is showing a year-to-date gain of 34%. Analysts see earnings growing 12% this year, to $1.54 per share. In 2013, that's expected to rise another 18%, to $1.78 per share.

Though the company has been steadily profitable in recent years, earnings growth is somewhat erratic, vacillating between double-digit and low-single-digit year-over-year increases. As with Gap, not all of the financial ratios are as bullish as I'd like to see. Return on equity is a bit on the low side, at 14%, and the free cash flow per share declined in each of the past two years.



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