In recent weeks, we have talked at length about the narrowing of the market advance — namely, that the bull market isn’t over, but it is getting much more selective.
Large investors that have the firepower to move stocks up or down are selling lower-quality stocks and concentrating on those with the strongest fundamentals. This is starting to show up in consumer-related stocks.
It seems consumers are focusing on only the best stores with the products and services that best fit their needs. They have not stopped shopping, as retail sales have been reasonably steady and consumer confidence showed gains last month — they have simply become more selective about where they shop and how they spend their money.
Also, it is important to resist the urge to pick a bottom in retail stocks that fall out of favor, because once you begin to lose your customer base it can take a long time to regain consumers’ confidence.
Look at JCPenney (NYSE:JCP). Investors have been trying to pick a bottom in JCP for some time, and many well-known investors have touted the stock as a turnaround … but business just keeps getting worse. JCPenney’s last earnings report was horrible, and the new CEO quickly became the old CEO. Investors who relied on Portfolio Grader to weed out nonperformers have avoided the 50% loss in the stock, as Penney has been a “sell” all year. In fact, the stock currently is a “strong sell” — Portfolio Grader gives JCP the lowest possible grade of “F.”
Bebe Stores (NASDAQ:BEBE) is another stock that has attracted some bottom-fishing investors in the past year. It was not that long ago that you saw the glittery Bebe shirts everywhere, but consumer interest in the company has faded quickly. Portfolio Grader noticed the fundamentals starting to slip from a “buy” in May of last year to a “sell” by September. Business has continued to decline, and its latest earnings report was horrible, with same-store sales down more than 8% year-over-year and total revenues down by almost 4%. BEBE now receives an “F” rating, denoting a “strong sell” recommendation.
American Eagle Outfitters (NYSE:AEO) is the latest stock to be subject to shifting spending patterns. The stock was rated a “buy” at the end of 2012, but fundamentals have continued to decline. After maintaining a “hold” rating for several months, Portfolio Grader downgraded AEO to a “D” in the past week — it is time to sell the stock.
Continue to closely monitor the fundamentals of consumer-related stocks, especially during this more selective stage of the rally, so you stay on the right side of both consumer and market trends.
Louis Navellier is the editor of Blue Chip Growth.