Don't let Wall Street blow smoke up your rear-end when it comes to investing in retail.
While nursing the flu the past two days, I had to contain myself from taking to Twitter to rip people a new one for their creeping bullishness on retail. First was the Morgan Stanley upgrade to a lame, indecisive "equal weight" on department store J.C. Penney (JCP) . Although the note was far from convincing -- meaning don't empty your kid's college fund and pour it into stodgy J.C. Penney -- Wall Street took it as an all-clear sign on retail. That somehow the sector, which has been battered over the past year due to the fundamental shift to online shopping and mixed consumed spending, was a screaming oversold buy.
Then there was the slick headline on Macy's (M) in Barron's that was no doubt designed to get everyone talking on Monday about a company that could be owned by a Canadian company with its own problems inside a year. Hey, you write a headline saying a stock could rise 50% and it's going to get people excited in the broader sector, too.
It's no small coincidence that these types of calls -- which come as folks try to be heroes before looming retail earnings reports this month -- arrive as the S&P 500 Retail Index has been outperforming the broader S&P 500 year to date. Investors are badly looking for undervalued sectors in this overheated stock market, and you would be surprised how quickly they forget about retailers being a horrible investment the last two years and buy into the new hype.
The S&P 500 Retail Index has risen more than 5% this year. Source: Yahoo! Finance
Sprinkle in Apple (AAPL) shares at an all-time high on the belief that the iPhone 8 will be epic, in effect driving scores of traffic to malls and Best Buy (BBY) later this year, and it's easy to see why the retail trade just feels like it wants to come back to life.
Unfortunately, if you think retail is a can't miss place to make money short-term and even long-term, then this writer has a flying chicken that churns out 50 pound golden eggs for sale. It will only cost you a $1, so get the emails flowing. The reality is that retail remains one of the worst places to park your money.
If you truly believe a company like Macy's is going to get bought and have some play money free to take a gamble, then by all means, let'er rip. But closing out a position in, let's say, a solid dividend-payer with good growth prospects such as PepsiCo (PEP) , to dump it all into J.C. Penney is a fool's game. Heed this advice: you will get your face ripped off.
Lost in the sauce on the J.C. Penney upgrade were these nuggets from the Morgan Stanley analyst on why retail basically still stinks.
"We view three 2016 issues as structural and likely to recur this year: (1) Worsening store traffic/transactions trends, (2) Amazon (AMZN) and off-price taking apparel market share, and (3) weak sales trends coupled with rising holiday expense pressure.
And for those unsure of where all this uber bearishness on retail is coming from this morning, here is a tidy list of other concerns:
- Retailer supply chains are ill-equipped to handle the shift to online shopping. Just think about it: companies such as Nike (NKE) place orders from China and wait for weeks until products are shipped over in containers. Further, clothing makers continue to place orders months in advance of key selling seasons. Production has to be brought closer to demand and when that demand could happen, and this will require the type of investment that Wall Street is in no way even thinking about.
- Retailer websites are putting their physical store assets at grave risk. All this talk about how shipping stuff from a website and having it picked up in a store is great for business is nonsense.
- Walmart's (WMT) e-commerce operations are about to kick into high gear under new leadership. The retail giant's free shipping for online orders is a huge deal that will likely trigger margin pressure throughout the retail sector. A knock-on effect of this is an even hungrier Amazon, which isn't good for anyone in retail.
- Retailers have mostly failed at getting people to pay full price during the economic recovery. Now, the sector has fallen back into the discount trap as a means to drive tepid levels of store traffic. That is not good from a margin perspective.
- We continue to have too many retail stores in America. Expect another thinning of the herd over the next three to five years. That thinning of the herd, headlined by the demise of Sears (SHLD) , will create margin pressure that no one is even talking about or modeling in.
- Off-price retailers are here to stay. Companies such as TJX Companies (TJX) , Ross Stores (ROST) and Burlington Stores (BURL) have been embraced by consumers as an OK place to shop for high quality goods.
Want one more for good measure? If Starbucks (SBUX) is struggling with the shift to digital shopping -- its stores are in malls and on street corners -- what makes shares of a sub-par retailer such as Kohl's (KSS) a screaming buy? Does that make any sense? Nope. And it's something all of the new retail bulls will be reminded of once they get shocked with some absolutely awful earnings reports and outlooks shortly.
Jim Cramer and the AAP team hold a position in Apple, Starbucks, PepsiCo and TJX Companies for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, SBUX, PEP and TJX? Learn more now.
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