Retail continues to be a twilight zone of sorts for investors. While aware that the landscape is forever changed and the days of brick and mortar are continually challenged by the online shopping 800-pound gorilla, shorter-term opportunities continue to rule the day. Markets have continued to price certain names as though they are in a death spiral, only to reprice them considerably higher once there is a bit of good news or there's the realization that the presumption of death was premature.
A recent example is craft specialty retailer Michaels Companies (MIK) , which was trading in the $17 range a year ago before cratering to the $5 range in mid-August. The retail sector in general has been in contagion mode in the midst of the tariff wars; when one well-known name has disappointed on the earnings front or announced other bad news, others in the sector have also felt the pain. That's just where the sector is these days.
In the case of Michaels, the company has remained profitable but has seen revenue slip over the past couple years, and that's a no-no in this environment. The market won't put up with that for long, especially in a dinosaur industry. However, Michaels turned the tables a bit when it announced better- than-expected second-quarter results before the market open Sept. 4. It beat the consensus on both the top and bottom lines, with earnings of 19 cents a share versus the 14-cent consensus estimate. Since then, Michaels shares are up 65%, yet MIK still trades at less than 4x next year's consensus estimates.
At the time of the earnings announcement Michaels was trading at just over 2x next year's estimates. Talk about disdain, talk about trading at a discount.
The problem is that it takes conviction to pull the trigger on companies in a dying sector in the midst of the tariff wars. During the summer of 2017's retail Armageddon it was easier. You knew the retail landscape was forever changed, but felt more confident that you could pick up shares on the cheap and close the positions with solid near-term gains. While those opportunities still exist, the stomach is a bit more queasy this time around, but it does not mean I am not looking.
I took advantage of At Home Group's (HOME) June 6 implosion, when shares fell from $17.51 to $7.50 -- a 57% single-day drop -- which came on the heels of reduced guidance. That seemed like a big overreaction, and my $8.49 entry price like a bargain. However, At Home shares continued to fall, all the way down to the mid-$4 range; not such a bargain after all, a terrible trade, but I held on. Since then At Home shares have rebounded above $9, so I am in the black. However, the ride has been wild, and that's what you can expect if you go dumpster diving in retail these days.
If you are going to try and scalp down-and-out retail shares these days, keep the position sizes small and realize that the markets are not acting rationally, at least in that sector. If you don't have a strong stomach and the ability to see shares cut in half or worse, stay away. Longer term, the sector is toast, but in the short term, inefficiencies abound.
