Shares of two discount retailers traded lower Tuesday following reports of critical comments about sales trends by an elusive, but periodically influential, research firm.
Shares of Dollar General (DG) slipped 2% Tuesday, falling to $68.50 in intraday trading, which would represent the lows for the stock since early summer. Meanwhile, shares of rival Dollar Tree (DLTR) had lost 4%, trading down to $76.50 in Tuesday's midday trading.
Reports said Cleveland Research made critical comments about sales trends at both discount retailers, and the stocks are extending what has been a two- to three-month downtrend in value.
The research firm behind the calls, Cleveland Research, is something of an enigma on Wall Street. Unlike conventional sell side research, the firm doesn't publish its research or release notes to the media. The firm has a strict "no media access" policy, so getting comment -- or even affirmation of the research calls -- is a fruitless pursuit. (Several news organizations, including Bloomberg, reported the research calls Tuesday.)
Further, Cleveland Research doesn't have a trading desk, leaving the impression that its research can't be biased by any opportunity to capitalize itself on the calls it's making. It is believed that the firm has a substantial audience among large institutional investors, perhaps as many as 150 of the largest such investors.
The firm sells its research to large banks and hedge funds so they can trade on the calls. Several hedge funds with large positions in the discount retailers were contacted for their perspective on Dollar General and Dollar Tree, but they all declined comment Tuesday.
Of course, Cleveland Research, with its critical calls on the discount retailers Tuesday, would also be advocating that the investors that rely on its research should turn pessimistic on the stocks of companies that have already been in precipitous decline.
Shares of Dollar General, for instance, came into Tuesday's session off 29% from its July high of $96.71, while Dollar Tree is off 18% from its late July high. Any hedge fund that is listening to the research today would effectively be locking in those losses from the summer highs.
Efforts to reach several of the hedge funds -- famously media averse -- that have big positions in the discount retailers was met with a string of "no comments." Dollar General itself declined to comment on the reports of Cleveland Research's call Tuesday.
Cleveland Research bases its research on channel checks. In the case of these retailers -- and Cleveland Research examines branded products companies, technology and health care, among other industry sectors -- Cleveland Research would likely be checking with branded product distributors and manufacturers. The firm would check on ordering trends to anticipate how sales are likely to shake up.
In the cases of Dollar General and Dollar Tree, those channel checks apparently indicated that sales trends will be softer than the companies have indicated when they report their results. Dollar General is slated to report its quarter Nov. 13, while Dollar Tree is due Nov. 29.
Dollar General's third-quarter sales are expected to rise 6% year over year, though sales growth could be driven partly by new store openings. Dollar General recently celebrated the opening of its 13,000th retail location, and continues to push the growth engine.
Dollar Tree is expected to report growth revenue growth of 3% when it reports late next month.
However, Cleveland Research is presumably looking at the more influential metric of same-store sales growth, which differs, of course, from overall sales improvements. Discount retailers such as these have a good degree of sensitivity to the federal food stamp program, so any deviation in the pace of that government assistance could have an impact on sales trends at those stores.
Clearly, as evidenced by Dollar Tree's 4% pullback Tuesday, calls by Cleveland Research can have an impact on stock valuations. However, the research isn't automatic. The firm reportedly made some critical comments about Kroger (KR) on Aug. 24, and the stock pulled back, by only $0.23. Last month it reportedly made some skeptical comments about AutoZone (AZO) , and the stock slipped that day, though its $0.61 loss brought the shares of the prominently high-priced stock to $742 a share. Meanwhile, Target (TGT) , a victim of the firm's criticisms Aug. 9, actually gained nearly a dollar on the day.