This commentary originally appeared on Real Money Pro at 10:52 a.m. ET on Thursday, May 12. Click here to learn about this dynamic market information service for active traders.
The hits just keep on coming for retailers. Following dismal forward guidance earlier this week from The Gap (GPS), Macy's (M) and Fossil (FOSL) issued similarly downbeat outlooks over the past day or so as well.
The "oil-dividend thesis" is played out for now, with "saturation" and "excess capacity" becoming the new watchwords among beaten-up retail-sector investors.
Prepare yourself -- multiples will not expand from here, and few retailers (if any) will be immune. Consumer-growth expectations simply can't be extrapolated into perpetuity given our current environment.
I've recently written that certain high-flying consumer-discretionary stocks like Norwegian Cruise Lines (NCLH), Texas Roadhouse (TXRH), Ross Stores (ROST) and Ulta Salon (ULTA) don't look buyable to me given the current consumer backdrop. For example, NCLH tanked after management offered weak guidance for the coming quarter.
And then there's Ulta, Wall Street's prized retail-growth story of the moment. The crowd won't be pleased if Ulta's recent breakneck growth doesn't continue. With a roughly $204 stock price and a projected $5.98 in earnings per share for fiscal 2016, Ulta currently trades at a generous 34x or so forward P/E. But analysts expect earnings to grow another 21% to $7.24 for fiscal 2017.
Personally, I put a stock's risk/reward range at $125 to $205 a share based on historical valuation ranges and adjustments to more-normalized growth in earnings.
As if retailers didn't face enough challenges, federal antitrust regulators this week successfully blocked the planned $6 billion merger of Staples (SPLS) and Office Depot (ODP). But despite the deal's demise, we can still count on further square-footage reductions in the office-supply-superstore space. And that's just the beginning of the sector's woes.
Another rarely discussed trend is the material underperformance of publicly traded auto dealerships. For instance, Penske Automotive (PAG), Asbury Automotive (ABG) and Lithia Motors (LAD) have fallen 36%, 30% and 24%, respectively, over the past 12 months. New- and used-car margins are under pressure, while comparables from the recent spate of recalls could crimp growth in the service-and-parts segment as well.
It's Time to Sell
The bottom line: Look out below! Sharpen your pencils, as the premium multiples that Wall Street has awarded to consumer cyclicals could be in the rearview mirror for now.
My advice: Continue to sell consumer-discretionary stocks and wait for investors' expectations to match back up with reality.