I love this kind of stock market. Beating the indexes is a piece of cake.

Why?

Because it’s a stock-pickers market, and if you know what you are doing you can make money by owning stocks going up and selling stocks going down.

On Thursday, shares of Wal-Mart (WMT) fell nearly 2% thanks to the company reducing its outlook due to falling sales.

Blame it on the weather or blame it on the weak economy that is supposed to be strong. Whatever the reason for the poor performance, it is not a good situation, considering Wal-Mart’s excessive valuation.

There’s your opportunity on the short side. Find a stock that is trading for a premium valuation that is likely to miss expectations. The results to the downside can be spectacular.

For Wal-Mart, a 2% loss on a day when the rest of the market traded higher is more like losing 5%. More losses are likely to follow.

If Wal-Mart is vulnerable, other retailers are likely to disappoint and fall as well.

I think the retail sector is quite vulnerable at the moment. At a minimum, poor weather will like blanket the industry like a cold, wet snow.

Here are three retail stocks I would dump now:

Target

Target (TGT) is at the top of my list of retail stocks to dump now. The poor performance at Wal-Mart (WMT) had investors selling Target shares in sympathy.

But Target has even bigger problems than Wal-Mart. Target’s credit and debit card breach may be fading from the headlines, but investors can expect the impact of the incident to linger. Yet unknown is the full impact on Target’s earnings and more importantly, customer traffic.

Look for same-store sales at Target to be below consensus. In addition, I think a warning and downward guidance of some magnitude is forthcoming and yet to be priced into the stock. This one is toxic and should be avoided or dumped now.

Whole Foods

Shares of Whole Foods (WFM) were dumped en masse after earnings were released recently. The stock had no chance, being priced for perfection in an environment that was far from perfect.

There is much more risk to the downside. The fallacy of the model is the idea that somehow Whole Foods could change the razor-thin margin dynamic of the grocery industry. Yeah, right! I’m skeptical and would never pay the exorbitant price Whole Foods is still valued at today.

Analysts expect the company to grow profits by 18% from the current fiscal year ending Sept. 30, 2014 to the next. At current prices, shares trade for 32 times current fiscal year estimated earnings. We are witnessing the slow collapse of the model here and I would dump this one before things deteriorate further.

Coach

Economic competition is fun to watch. In our system of capitalism there are winners and losers in every industry.

In the retail space, there is a battle royal brewing in the luxury-goods category. Michael Kors (KORS) is the hot new kid on the block and it is taking aim at the old-school luxury accessory company, Coach (COH). Fashion is fickle as they say. Now you can make hay by betting against the loser in the race – Coach.

Since last summer, Coach shares have really taken a hit. They can and will likely decline further. Growth is slowing dramatically. Analysts expect the company to grow profits by 9% from the current fiscal year ending June 30, 2014 to the next.

At current prices, shares trade for 15 times current fiscal year estimated earnings. The big fear is if Coach has to respond to the competition and declining sales with margin-killing discounts. If so, the bottom could fall out.

I would dump this one now before that happens.