How bad can Macy's (M) really be? How awful is Target (TGT) ? What can you really do about Kohl's (KSS) ? Is Nordstrom (JWN) for real when it says it wants to go private after this current Amazon (AMZN) rampage?
Is this really the end of the off-price retailers like Action Alerts PLUS charity portfolio holding TJX Companies (TJX) , and Burlington (BURL) , and Ross (ROST) ? How did Costco (COST) become doomed? Just forget about Bed Bath & Beyond (BBBY) ? Write off AutoZone (AZO) and its ilk? Stick a fork in Best Buy (BBY) ? Bury Kroger (KR) ? Chuck CVS Health (CVS) and Walgreen's (WBA) ? Hang on to Walmart (WMT) some way, somehow?
I think, in the wake of Amazon Prime, we are still trying to figure out what to do with this group of companies that has so many sellers in it. Perhaps, as Target's positive pre-announcement might be signaling, we have gotten too negative on the group?
It's a great test of the moment. More important, though, whenever I see an en masse sector decline like this, I always like to step back and see what the decline is really saying.
First, what it's not saying. Nobody is saying that these companies are going out of business. Their cash flows are still pretty good, their sales, while not electric, aren't falling off a cliff.
Second, nobody is saying that, at least right now, their dividends are suspect. I do believe that their buybacks are probably going slower and their spend for e-commerce is going faster, with much of it not producing anything other than cannibalization of bricks and mortar.
Third, as spectacular as Amazon's Prime Day was, there will still be plenty of people who shop at bricks-and-mortar shops, especially for the things that don't make for easy shipping: plants, chipper shredders, and, for now, steaks and dairy.
Fourth, I do not think that every stock in the group has to trade down to mid-single digit price to earnings multiples as is the case of with Macy's or Bed Bath, the two that the market perceives as most vulnerable to the Amazon grim reaper.
But I have only seen this endless selling phenomenon a couple of times in my life, and when I see it, the pattern is signaling something the stock market is very bad at discounting and very bad and being rational about. These declines mean that 2018 will be a down year for these companies versus 2017.
Time and again, when you see endless liquidation, you can almost count on estimates for 2018 being below estimates for this year.
Classic case? Christmas. I think that these stocks are all saying that next year's Christmas will be worse than this year's and that this year's might be worse than last year's.
It's taken some very heavy mental lifting to get portfolio managers to understand this "down year" conundrum, and they seem to get it almost one by one, with each revelation producing more selling.
That's because of the changing metrics that had been used to predict sales. Typically, we would be huge buyers of these stocks based on job growth, low interest rates and easier credit creation, all of which we have in spades. Those are perfect reasons to make this group one of the strongest in the market.
But it is an unwritten law that no portfolio manager can ever buy a stock where the numbers are going to be down year over year, whether it be in oil, gas, copper, autos or now retail.
Let's take Kohl's, ostensibly a decent operator generating a huge amount of cash and a good dividend. Right now, the street is predicting $3.68 for this calendar year. For next year, it is predicting $3.56. Under what guise can you own shares in that company if that's the trajectory? How do you put a price-to-earnings multiple on a company when the earnings are slipping? Kohl's, when you consider it that way, is simply a wasting asset.
Macy's earned $3.15 last year. This year? It is projected to earn $2.87. That's why there's a relentlessness to the selling. You just can't buy a stock for a 7% yield if the earnings are going to be down. Bed Bath? It earned $4.61 last year; this year? It should earn $4.05.
Portfolio managers would rather be caught dead than be caught in a stock where the numbers will have that kind of progression.
Now, today's a crucial day because Target is putting up a defense that this is not the case. It says it sees positive comps, not a decline as the street is forecasting. This is going to be the test of the down year thesis.
I wonder if people will believe. We will know soon enough. The group is oversold and perhaps too hated. Target can trigger a rally, or at least a short-cover rally in the group.
But if it doesn't, then you can bet we won't try to discern winners from loser.
They will all be losers now.
