by James Brumley | August 13, 2012 9:14 am
Why is it so easy to find a plethora of buy opinions on a stock when it’s undervalued, but all those prognosticators are nowhere to be found when it’s time to sell those very same names?
Not that I haven’t been guilty of the same, but by and large, when I open a can of worms with a bullish call, I like to close it, too.
So, I’m closing the can of worms I opened back on May 24 when I said Wal-Mart (NYSE:WMT) was a buy-worthy name. The stock has climbed from $63.73 then to $73.63 now — a 15% move. I know it’s not a huge gap up, but then again, it hasn’t been a huge amount of time. It doesn’t matter. Given where Wal-Mart is now, there’s more risk than reward in owning it.
Just to be clear, this isn’t a judgment call on the company. Whether you like Wal-Mart or hate it, there’s no denying the company’s revenue and sales growth. And, it would be nuts to think the growth trend is going to stop anytime soon.
Click to Enlarge This is, however, a judgment call on the shares themselves. At the end of May, they were trading at a trailing P/E of 13.96, which is fairly palatable. Right now, however, they’re trading at a trailing P/E of 15.85, which still is palatable, but on the very high end of the valuation range Wal-Mart has left behind after the recovery began in early 2009 — P/E levels that we saw a couple of times in early 2009 before a pretty significant pullback for the stock. So, I’m more than a little uncomfortable now in seeing conditions that historically haven’t lasted long.
Oh — it doesn’t hurt my sell call that the stock is technically overextended as well, as the nearby chart illustrates.
While I haven’t made a buy call on Costco (NASDAQ:COST), I’m still going to make a sell call on it. While it somehow has justified a P/E in the 20s since early 2011, even COST is pushing its luck at 26.6 times its trailing earnings.
Click to Enlarge And like Wal-Mart, it doesn’t hurt my bearish call that COST also is overextended and spent the bulk of this past week making lower lows and lower highs. The stock also closed under its 20-day moving average line on Friday, cementing in place yet another dip like the many we’ve see since mid-2011 after shares got a little ahead of themselves.
Again, there’s not a thing wrong with the company. It’s just a lousy time to step into an investment, and a great time to step out of one.
So with Wal-Mart and/or Costco now leaving behind a hole in your portfolio, how are you going to plug it up? Fear not — I’ve got an idea for you, and you don’t even have to leave the general merchandise retailing industry to find it. It’s Fred’s (NASDAQ:FRED).
Unlike Wal-Mart or Costco, unless you’re in one of its geographical markets, you might never have heard of Fred’s. It’s a 679-unit chain of general merchandise stores, many of which also include pharmacy services. The retailer exclusively operates in the southeast United States.
Click to Enlarge That’s not the important part to would-be investors right now, though. What’s important is how the stock appears to have jump-started a long-term rebound that has been brewing for years. Specifically, the chart has turned a string of lower lows before 2008 into a string of higher lows since 2008. Shares also have been chipping away at three horizontal resistance lines at $14.40, $15.30 and $15.80. Though it’s not over the last of those ceilings yet, it’s pushing the issue harder and harder every week now — a break above $15.80 is well within reach. Best of all, after a four-year buildup, that breakout should be explosive once started.
It’s not just a chart-based buy, however. Fred’s is quietly cranking up sales as well as the bottom line. Year-to-date sales are up 3.6%, mostly thanks to new store openings, and per-share profits are expected to be up 21% year-to-date when the retailer posts Q2 numbers later this month.
There’s no valuation pitfall, either. At 14.7 times its forward-looking income, FRED actually is cheaper than both of the bigger brothers mentioned above, on a trailing or a forward-looking basis.
Bottom line? It’s obviously not a complicated set of buy/sell decisions, but sometimes, the simplest analyses yield the biggest results. Fred’s just offers more reward than risk right now, while Wal-Mart and Costco don’t.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
Source URL: http://investorplace.com/2012/08/retailer-rotation-sell-these-two-then-buy-this-one/
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