The December retail sales report caused a shock wave in the retail sector. Most retail stocks fell on the headline regardless of individual fundamentals. But now some traders and investors are starting to question their choices. And this questioning has created a few promising opportunities in the retail sector.
We are in an age where information is instantaneous, so when headlines come out, everyone trades the same headline and at the same time. Add to this that machines now control a lot of trading money and this makes for a recipe where the headline effect is now more visible than ever.
Since the sales report came out, we have received other reports where the numbers conflict with the initial disaster message. This tells me that the December sales report may have been a fluke. This is especially likely since it covered the period when we had the longest government shutdown in history.
Yesterday, we saw big rallies in Kohl’s (NYSE:KSS) and Target (NYSE:TGT). They both reported earnings and beat expectations. They also guided well going forward. There were no specific alarms from the December sales period. So for now, I assume that the December retail report was a false tell, and that makes now the perfect time to capitalize on its effects.
With all of that said, here are three retail stocks that have a bright future regardless of general data.
Canada Goose (GOOS)
Canada Goose (NYSE:GOOS) just reported earnings, and the knee jerk reaction was to spike GOOS stock down 15% on the scorecard headline.
But part of this drop was thanks to the unlucky timing of the report. GOOS earnings came in right around the release of the December retail report, which was the worst since 2009.
At the time, I pounced on it and sold puts into the fear to go long the stock and made money almost instantly.
I believe that the opportunity is still here.
It’s not like they delivered a bad report … just the opposite, in fact. GOOS beat on all metrics and they raised forward guidance significantly. So the company over-delivered and still said they’d even do better next time, yet traders sold it? This is the definition of an opportunity. Luckily, GOOS stock is still low enough that I’d still go long. If the stock markets are higher, GOOS will definitely be higher in the future.
Furthermore, Canada Goose’s clientele seems loyal and that is hard to short. I chose this stock specifically because it was punished by mistake over a “fake news” retail report.
The next two retail stocks I chose for the exact opposite reason: They both held strong through the same unjustified retail fears.
Similar to GOOS, Yeti (NYSE:YETI) also has a strong following. Its clientele are cult-like, so on any weakness, I go long.
The problem is that this stock hardly shows any. It’s a momentum stock so it always looks like it’s about to correct. YETI stock is up 65% year-to-date, so it left a lot of weak points behind it. This means investors might want to wait out a few ticks to see if the bears want to fill the gap below, near the $20 per share level.
Or investors can just sell a long dated put below it. This allows you to go long immediately and if it falls below the strike, then you get to own YETI stock for a huge discount. For example, you can collect $1.20 per contract for selling the Aug $17.50 put. The breakeven point for this would be $16.30.
By selling the put, you commit to owning the shares, so only do this if you are able to buy them. Otherwise, there would be margin calls against your account.
Tencent Music Entertainment Group (TME)
Tencent (TCEHY) recently spun off its music streaming company into Tencent Music Entertainment Group (NYSE:TME). TME — also referred to as the Spotify (NYSE:SPOT) of China — is a sure winner among most other retail stocks.
The general stability of its base business model means the company has room to execute on plans for whatever else it wants. The new model for success is now service based. Even giants like Microsoft (NASDAQ:MSFT) learned this new trick and they are now embracing subscriptions more than one-time sales.
TME has been on a tear perhaps riding the wave of a U.S.-China deal as both markets continue to rally. It’s up 40% YTD, which is pretty much its entire life as a public stock. I was lucky enough to bet on it early last year, but I still think TME stock is one to hold for a long while. It has a great model in a massive market and it has the support of a giant company behind it, so that is a recipe for long-term success.
Fundamentally it’s not cheap, but it is definitely not bloated. It sells at a high price-to-earnings ratio (56), which is high if you compare it to a company like Apple (NASDAQ:AAPL). But TME stock is in a completely different stage of life.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.