Thanksgiving is here, to be followed tomorrow by the kickoff to holiday shopping season know as “Black Friday.” And while I plan to avoid the mall crowds as much as possible, there’s another way to participate in Black Friday: Scooping up premium retail stocks at bargain prices. And as we speak, a handful of retailers have made headlines with their recent earnings announcements, and there are some important lessons to be learned here before the shopping rush.
Best Buy (NYSE:BBY) may be “making technology work for you,” but it’s clear that it didn’t make third-quarter earnings work for shareholders after posting a $10 million net loss for the quarter and missing the consensus earnings estimate by 42%.
Best Buy has been somewhat of a basket case lately; this is an F-rated stock in Portfolio Grader. According to management, the company has struggled to compete with big box stores like B Wal-Mart (NYSE:WMT) because consumers assume (sometimes mistakenly) that the competition always has better prices.
On top of this, Best Buy hasn’t adapted as quickly to internet sales, so it is also hemorrhaging market share to online marketplace sites like Amazon (NASDAQ:AMZN). So this Black Friday, while you may be drawn into their stores, I want to you steer clear of this stock.
So I wouldn’t consider Best Buy’s earnings a red flag for retail as a whole. In fact, shoe chain DSW Inc. (NYSE:DSW), also announced third-quarter earnings today, with markedly different results. Shares gapped up 8% after DSW announced that same-store sales grew at a double-digit rate for the 13th quarter in a row. Both sales and earnings topped estimates; in fact, DSW pulled off a 15% earnings surprise. With 18% sales growth and 53% earnings growth forecast for the fourth quarter, DSW is currently a B-rated buy.
The point I want to hammer home is that this holiday shopping season, you’ll want to keep a handful of retailers in your portfolio. As I mentioned in an earlier post, the National Retail Federation forecasts $586.1 billion in total holiday sales—a 4.1% jump over last year, and this will undoubtedly fatten profits for some companies.
But consumers have learned from the recession, and they’re still picky with where they spend their money, so some retailers will fail to attract more traffic. A good way to separate the wheat from the chaff is by running each of your potential buys through Portfolio Grader—my long-time readers can tell you that this allows you to assess a company’s profit potential at a glance.