It’s Time to Stop Chasing Retailers

As a group, prices have largely caught up to fundamentals

   
It’s Time to Stop Chasing Retailers

retail1 300x173 It's Time to Stop Chasing Retailers
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Talk about climbing a wall of worry — retail stocks have been beset by concerns ranging from consumer deleveraging, high unemployment and rising gas prices, yet the sector continues to print new highs.

The SPDR S&P Retail ETF (NYSE:XRT) has tacked on a gaudy 38.9% since the Oct. 3 low and, according to ETF Database, it’s the seventh-best performer in the ETF universe since the stock market bottomed three years ago.

And why not? All of the headlines are firmly at the sector’s back. February same-store sales grew 6.5% for the 18 retailers that reported results, and retail sales hit a record high in February. The result has been substantial outperformance for XRT during the past year.

Even after months of strong gains, retailers’ valuations aren’t particularly rich in relation to their growth prospects. As can be seen in the table below, the majority of retailers are trading at premiums to their historical valuation levels, but earnings estimates point to strong future growth in the year ahead. Also, earnings estimates — with the notable exception of Amazon (NASDAQ:AMZN) — generally have been moving in the right direction.

Company Ticker Return
Since 10/3
Trailing
P/E
5-Yr.
Avg.
Premium Growth
’12-’13
Ests., past
90 days
Wal-Mart WMT +18.31% 13.5 14.4 -6.7% 8.8% -2.4%
Amazon AMZN -13.49% 132.9 73.9 +44.4% 106.2% -27.5%
Home Depot HD +55.99% 19.8 16.3 +17.7% 12.9% +4.2%
CVS Caremark CVS +38.59% 17.4 16.0 +8.0% 12.5% +2.8%
eBay EBAY +28.71% 15.0 47.2 -214.7% 15.7% -1.1%
Target TGT +22.68% 13.6 14.6 -7.4% 13.9% -3.0%
Costco COST +10.18% 26.1 23.0 +11.9% 13.2% -0.7%
Lowe’s LOW +59.15% 21.1 16.0 +24.2% 20.3% +4.3%
Walgreen WAG +11.71% 11.2 15.8 -41.1% 10.2% -6.4%
TJX TJX +41.84% 19.7 16.0 +18.8% 11.7% +3.2%
Macy’s M +56.50% 13.4 14.9 -11.2% 13.9% +4.7%
Bed Bath &
Beyond
BBBY +12.72% 16.7 16.1 +3.6% 13.8% +1.6%
Dollar General DG +18.44% 21.7 19.9 +8.3% 16.8% +0.7%
AutoZone AZO +22.11% 17.7 14.3 +19.2% 16.0% +1.7%
Limited Brands LTD +25.36% 17.4 17.0 +2.3% 12.7% -1.5%
Ross Stores ROST +48.97% 21.0 15.2 +27.6% 15.0% +4.4%
Kohl’s KSS +7.16% 11.9 14.7 -23.5% 12.3% -9.7%
Gap GPS +59.50% 16.2 13.5 +16.7% 12.1% +5.2%
O’Reilly
Automotive
ORLY +38.62% 24.2 19.6 +19.0% 14.2% +4.7%
Nordstrom JWN +19.51% 17.3 15.2 +12.1% 13.6% -2.7%
Dollar Tree DLTR +26.68% 23.1 17.3 +25.1% 14.0% +2.4%

While the fundamentals are sound, prices have come so far in recent months that retail stocks are now bumping against their median price targets, which might indicate that the sector’s performance is about to slow down to a pace more closely in line with the broader market:

Company Median Target Tuesday Close Difference
Wal-Mart $65 $61.00 +4.9%
Amazon $220 $184.59 +19.2%
Home Depot $52 $49.14 +5.8%
CVS Caremark $49 $45.23 +8.3%
eBay $39 $37.33 +4.5%
Target $63 $58.48 +7.7%
Costco $90 $89.98 marginal
Lowe’s $30 $30.23 -0.8%
Walgreen $35 $33.25 +5.3%
TJX $39 $38.05 +2.5%
Macy’s $43 $39.57 +8.7%
Bed Bath & Beyond $69 $62.55 +10.3%
Dollar General $46 $43.86 +4.9%
AutoZone $405 $378.63 +7.0%
Limited Brands $47 $47.26 -0.6%
Ross Stores $55 $56.96 -3.4%
Kohl’s $57.50 $51.25 +12.2%
Gap $24.78 $25.45 -2.6%
O’Reilly Automotive $90.50 $90.07 +0.5%
Nordstrom $55 $54.90 +0.2%
Dollar Tree $95 $93.50 +1.6%

Add it up, and it looks as though stock prices largely have caught up to fundamentals in the retail sector, reflecting the recovery in investor expectations from the rock-bottom levels of mid-2011. The overall story remains positive, but retail stocks are now at levels where they have become more much more vulnerable to disappointment.

It therefore appears that the time for chasing these stocks higher is largely behind us, and those who are already invested should consider tightening their stops or selling calls to collect premium. Caution — rather than aggressiveness — should now be the order of the day for retail investors.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/its-time-to-stop-chasing-retailers-xrt-amzn-wmt-tgt/.

©2014 InvestorPlace Media, LLC

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