A few weeks, ago, Tom Taulli explored the pros and cons of Sears Holdings (NASDAQ:SHLD) and concluded, “… for now, Sears’ cons outweigh the pros.” Since this piece was published, SHLD has gained another 16%. (Sorry, Tom. Sears has fooled a lot of us.)
Sears is a tricky one, as it continues to move higher despite fundamental struggles and far-reaching pessimism. Late last week, Sears said it would close 62 retail stores by mid-summer. This is in addition to the 120 store closings announced in December and the 11 locations being sold to real estate investment trust (REIT) General Growth Properties (NYSE:GGP). And in a bit of an ironic twist, the venerable retailer appointed a new president of real estate development this week. (One might wonder how much development is needed when locations keep getting shuttered).
On the earnings front, SHLD has fallen short of analysts’ expectations in seven of the past eight quarters. Year-over-year, earnings are off more than 11%. Looking ahead, earnings are expected to rise just 2.3% year-over-year for the next three to five years, compared with an 8.8% average growth rate among the broadline-retail sector.
Even most experts won’t touch SHLD with a proverbial 10-foot pole. Of the seven brokerage firms following the stock, five have named it an “underperform,” leaving one “hold” and a single “buy.”
And yet, the shares are up a whopping 150% year-to-date (although still fractionally lower over the past 12 months). This compares to an 8% advance in the Dow and a 12% boost in the Merrill Lynch Retail HOLDRS ETF (NYSE:RTH). So who keeps buying Sears shares, and why? And how long can the upside possibly continue?
The Short Story
Short-covering might be a prime contributor to the stock’s ride higher in 2012. At the beginning of January, there were more than 15.4 million shorted SHLD shares, good for a short-interest ratio of 5.9. In other words, it would take 5.9 days, at the stock’s average daily trading volume, to unspool all existing shorted positions.
Short interest has steadily declined since the beginning of the year and now checks in at 12.53 million shares. That’s a decline of almost 19% in under three months. What’s more, the short-interest ratio has dropped to 4.5.
By definition, short sellers close their bearish positions by buying the shares (so they can return them to the broker from whom they borrowed the stock in the first place). This can artificially inflate buying demand. Not to say that this is behind the stock’s entire 150% surge, but it likely is part of the cycle.
Click to Enlarge For the past several sessions, SHLD has been butting up against the $80 level. This round number previously served as resistance last July and November. Meanwhile, the stock’s 14-day relative strength index (RSI) reading is hovering around 70, right near an annual high. Historical peaks in this oscillator often suggest the underlying stock is in an “overbought” situation and might soon revert to the mean.
Combine a lofty RSI with overhead technical resistance and — dare I say it? — now could be a time to consider selling.
If you dare to bet against an impressive uptrend.
As of this writing, Beth Gaston Moon did not hold a position in any of the aforementioned securities.