With stocks extended and sentiment at extremes, the market has been taking a breather so far in 2014 with the major averages off to their worst start to a year since 2005.
Negative catalysts are beginning to reappear. Partisan rancor has returned to Washington and another debt ceiling fight looms as politicians cross swords over extending unemployment benefits. Emerging-market stocks are breaking down. The Federal Reserve looks ready for more tapering, pulling back on its bond purchase stimulus as interest rates rise.
As a result, more opportunities for stocks to sell and even short are popping up on my screens — with a focus on retailers. There’s good reason for this: The 2013 holiday shopping season was a dud because consumers were pressured by stagnant wage growth and a higher cost of living that resulted in a dip in savings and an increase in borrowing. Without a turnaround in wages, this isn’t sustainable.
According to ShopperTrak, store foot traffic dropped nearly 15% this holiday season, a huge decline from the 2.5% increase seen in 2012. Retailers also over-purchased, and given weak sales, are burdened with too much inventory. That’ll pressure profit margins when Q4 earnings are released.
That sets up the following look at three retailers to sell or short right now:
Stocks to Sell #1: Best Buy (BBY)
Click to Enlarge Best Buy (BBY), the well-known electronics giant, went on a tear in 2013 as its price-match policy helped win back market share from Amazon (AMZN) and other online competitors. Shares more than quadrupled at one point, returning to levels not seen since 2010.
But BBY stock is cooling its heels now as the bloom comes off the idea, with electronics sales flat during the holiday shopping season, as well as the lack of a major tech wave to drive customer traffic the way HDTVs did during Best Buy’s heyday.
BBY stock is in a confirmed downtrend, rolling down its lower Bollinger band. A move to the 200-day moving average would be worth a 15% decline from here. I’ve added BBY short to my Edge Letter Sample Portfolio.
Stocks to Sell #2: Office Depot (ODP)
Click to Enlarge Office Depot (ODP) recently completed its acquisition of smaller rival OfficeMax, consolidating a troubled office supply sector that’s being pinched by cheaper alternatives and a lack of a clear reason for existence when paper, pens and toner can be found just about anywhere nowadays.
Like Best Buy, ODP stock has been on a tear as investors — hopeful that consolidation in the industry would boost profitability — bid shares up from a low of $1.51 in late 2012 to a high of $5.85 in October.
But after consolidating for the past four months, Office Depot shares have broken out of a pennant pattern, setting the stage for a return to the September lows — a 13% decline from here.
I’ve also added ODP short to my Edge Letter Sample Portfolio.
Stocks to Sell #3: PetSmart (PETM)
Click to Enlarge PetSmart (PETM) is another specialty retailer that had been surging higher, but now amid a slowing of same-store sales and customer traffic, is rolling over.
After a huge uptrend between 2009 and early 2012, PETM stock has been sliding sideways near $70 in a narrowing consolidation pattern. After a downgrade from Deutsche Bank analysts on Monday, PETM broke down and is now in free fall below its 200-day moving average on a surge of negative volume.
Disclosure: Anthony has recommended BBY and ODP short to his clients.