U.S. equities are drifting lower on Friday, and retail stocks in particular are getting hit on the chin, as investors focus their attention on recent hawkish commentary out of the Federal Reserve. The aggressive shift in tone has raised futures market odds of a rate hike at the upcoming March policy meeting in two weeks.
That threatens to usurp the “Trump-flation” theme that has driven the post-election market rally and pushed the Dow Jones Industrial Average up and over the 21,000 level for the first time ever earlier this week. Adding to the nervousness has been some weakness in the “hard” economic data.
Market breadth continues to disappoint, with large swaths of the market struggling to find traction as momentum in key financial and technology stocks keep pushing the major averages higher. Tepid earnings results and evidence consumer confidence isn’t translating into the kind of pickup in spending that many expected, and that has hit retailers in particular.
As such, a number of retail stocks are getting hit hard of late. Here are four sector picks that are simply toxic at the moment and should be avoided or sold short.
Retail Stocks to Avoid: JCPenney (JCP)
J C Penney Company Inc (NYSE:JCP) shares are threatening to fall down and out of a four-year trading range with critical support near the $6-per-share level. The stock has been struggling since late 2013 as a previous turnaround plan by a former Apple Store executive, Ron Johnson, failed miserably, giving way to the current effort to refocus on its core customers via discounting and coupon offers.
JCP reported better-than-expected earnings of 64 cents per share back on Feb. 24, with revenues down 0.9% from last year. Forward guidance was in-line with estimates as management announced a plan to close upwards of 14% of its store base.
The company will next report results on May 12 before the bell. Analysts are looking for a loss of 23 cents per share on revenues of $2.78 billion.
Retail Stocks to Avoid: Macy’s (M)
Macy’s Inc (NYSE:M) shares are under pressure on Friday as headlines cross that a potential acquisition bid from Hudson’s Bay (OTCMKTS:HBAYF) — owner of the Lord & Taylor and Saks Fifth Avenue chains — hasn’t yet secured the necessary financing. Reuters is reporting that while Hudson’s Bay is still trying to find an instructional partner to back the bid, it may decide to pursue another acquisition target.
Why the lack of excitement in the offer? Because a big real estate investment in mall properties like Macy’s isn’t looking attractive to many as consumers increasingly move their spending online.
The result? Macy’s shares are falling below their 50-day moving average in quick fashion.
Macy’s will next report results on May 11 before the market. Analysts are looking for earnings of 36 cents per share on revenues of $5.5 billion.
Retail Stocks to Avoid: Target (TGT)
Speaking of changing consumer behavior and the ongoing shift to e-tailers: Target Corporation (NYSE:TGT) shares have plunged some 15% over the past week.
The catalyst: Target reported weaker-than-expected earnings ($1.45 per share vs. $1.51 expected on a 4.3% drop in revenue), issued very weak guidance and warned that investment spending will need to be ramped up as the company responding to a changing marketplace.
In its post-earnings call, management said roughly $7 billion in spending will be needed in the years to come to update and remodel hundreds of stores while expanding to urban centers to make shipping and online shopping pickup easier.
Target will next report results on May 17 before the bell. Analysts are looking for earnings of 91 cents per share on revenues of $15.6 billion.
Retail Stocks to Avoid: Kohl’s (KSS)
Kohl’s Corporation (NYSE:KSS) shares are threatening to break down out of a three-month consolidation range that, in turn, has capped a three-year sideways slide near the $42-a-share level.
Analysts at Telsey Advisory Group recently lowered their price target in the stock — despite what they view as a solid Q4 earnings performance — amid ongoing concerns over declining traffic (down 6%) last quarter, reflecting an accelerating to the downside (vs. declines of 5.7% in Q3 and 4.8% in 1H16).
The company will next report results on May 11 before the bell. Analysts are looking for earnings of 29 cents per share on revenues of $3.9 billion.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
