Why It’s Time to Sell the Consumer
Earlier this week, we learned that consumer confidence soared in April. And while the news is much appreciated, the move seems
to be in response to a two-month surge in stocks versus any real strength on the home front.
The jobs market is still poor with wages stagnant or declining. Corporations are still in lay-off mode, and oil prices are marching
ever higher. In other words, there are still hurdles to overcome before the “all clear” can be given.
I don’t mean to rain on the parade of recovery, but let’s not get too far ahead of ourselves. Stocks tied to the consumer have
already left the station. Some are up double or triple from the lows set just two months ago.
Economic growth, on the other hand, is expected to be anemic, at best, well into 2010 suggesting that the stock gains of late
have more to do with short covering than any lasting positive growth trends.
As such, now might be a good time to take some money off the table. In addition, the summer months are traditionally slow for
stocks. I would have no problem selling any number of stocks, especially those with huge gains in such a short period of time.
Here are five consumer stocks to sell now…
Consumer Stock #1
Pacific Sunwear (PSUN)
The problem with using consumer confidence as a guide to buy stocks is that consumers tend to be fickle. Nowhere is that more
true than in the clothing space, especially the teeny bopper clothing space. Fall out of favor with the younger crowd, and your
business can be destroyed. Poor management decisions don’t help, either.
Pacific Sunwear (PSUN) lost its mojo and has yet to find its way. Earlier this
year, shares bottomed at a price below $1 per share. Since that time, PSUN has been on fire more than tripling in value. And then
last week, the company announced another quarterly loss and drop in same-store sales.
Granted, PSUN beat the number, but playing that game does little for long-term sustainability of value. I would take some money
off the table here–PSUN is due for a pull-back.
Consumer Stock #2
Pier 1 Imports (PIR)
When a bear market ends, stocks at the bottom of the barrel often see violent bounces to the upside. Most of this is caused
by shorts that pummeled the stock on the way down covering positions and locking in gains. It would be a mistake to see these
moves as anything but inefficient. As such, the volatility can and should be traded for maximum gain.
Pier 1 Imports (PIR) hit the rock bottom price of 10 cents per share in early
March as the market bottomed. Now two months later, PIR trades for more than $2.00 per share. In early May, the stock gained more
than 10% as it regained compliance with the New York Stock Exchange. I can appreciate the enthusiasm for PIR and its turnaround
play, but there is still a lot of risk here.
I would take what the market has given, because the market can easily take it away. I expect PIR to give back these gains as
Consumer Stock #3
Landry’s Restaurants (LNY)
One of the first movers seeing an uptick in spending due to increased consumer confidence, is the restaurant space. Only a few
diehards really like to stay home and cook. Dining out is a great way to escape. Even better is that going to a restaurant for
a meal that is affordable. The fact that dining suffered during this recession is indicative of how bad things were.
Given that confidence is rising, it is no surprise then that Landry’s Restaurants (LNY)
has almost tripled in value since hitting the bottom in early March. While it is true that the stock sell-off went too far, it
is also true that this rally has gone a bit too far. The stock trades for a high multiple of earnings, and one can debate if confidence
truly translates to more spending. The more likely path in the short term is down.
I like the story in the long term, but I would prefer buying LNY at a cheaper price.
Consumer Stock #4
Does it make sense to buy a stock that is up 300%? If so, I would want to be darn sure about future earnings prospects needed
to support a premium valuation. In the case of AnnTaylor (ANN), I’m not convinced
that future prospects are secure.
Recently, the company announced cautious guidance suggesting that difficulties will persist through the remainder of the year.
This comes in the aftermath of announcing a first quarter loss and decline in same-store sales. While the competition for women’s
clothing may be improving, it doesn’t appear to be translating directly to ANN.
Again, I ask: “Would you buy a stock like this after a 300% gain?”
I think not.
Consumer Stock #5
Skechers USA, Inc. (SKX)
The move in Skechers USA, Inc. (SKX) from the March lows pales in comparison
to the triples or more seen in some retail names. That said, the stock did more than double in value before pulling back in early
May. Much of that gain happened on the heels of a better-than-expected earnings report that showed the company making a small
Wall Street was expecting a small loss. No matter that profits dropped by 75% as compared to one year ago. Indeed a recovery
suggests that earnings at this level will not last forever, but the earnings march higher is likely to be a longer process than
currently expected. Nor will it be a straight line. What is more likely is a bumpy recovery that has fits and starts.
Stocks like SKX can be traded as we bounce between recovery and recession. At this moment, I would be a seller of SKX.