This is an incredibly tough market to predict. One week we go higher and the next week we go lower. One thing that is certain is that stocks with negative earnings momentum tend to stay that way. As such, selling stocks that no longer fit my parameters is a great way to protect profits in an uncertain market.
Specifically, the retail space is full of winners and losers. I want to own the winners and sell the losers in this market environment.
In my estimation, the consumer is still strapped. With income growth non-existent and personal assets mainly in real estate, distressed balance sheets are still in disarray. Add in growing inflation in the critical areas of food and fuel, and it is easy to see why future spending is at risk.
Here are 5 retail stocks to sell now:
Target (NYSE:TGT)
The financial crisis and recession put a monkey wrench in the business model of Target (NYSE:TGT). The chic styling at low price may have worked when times were good, but in this economy the focus now is on pricing. If you don’t have the lowest prices, you are likely to struggle.
That’s why Target has been so focused on trying to rejigger its business by allocating shelf space to bargain pricing. There is a reason you don’t hear about trendy styles at low prices in their market material.
Shares of Target have fallen off the cliff in 2011. The stock is down 16% so far this year. A recent rally thanks to strong retail sales in June has the stock off the year-to-date lows. I would use the rebound as an opportunity to sell.
Lowes (NYSE:LOW)
The homebuilding market is still a mess — and it is unlikely to come back any time soon. As such, businesses tied to construction or housing will likely to struggle for the foreseeable future.
In the hardware superstore wars, both Lowes (NYSE:LOW) and Home Depot (NYSE:HD) are having a hard time of gaining any traction given the troubles in the market. Specifically Lowes has stumbled since peaking earlier this year. The stock is down 14% since mid-April.
Selling in Lowes accelerated thanks to the company missing earnings estimates by two cents per share in its last reported quarter ending April 30. I expect another miss for the current quarter. The average estimate for earnings in the period set to end July 31, 2011 is 67 cents per share. I’d look for a number closer to the low estimate of 63 cents per share.
Best Buy (NASDAQ:BBY)
The giant electronics retailer, Best Buy (NASDAQ:BBY) is having a tough go of things. At a time when it should be enjoying king of the mountain status as the sole surviving big box retailer of home electronics and appliances, the company is dealing with headwinds that have made it a target of short sellers.
Shares of Best Buy are down a whopping 35% since hitting its 52 week high at the end of last year. The stock received what I believe will be a short term bounce when it reported results for the quarter ending May 31, 2011. Higher smart phone sales resulted in the company beating estimates by 2 cents per share.
More troubling for me is the news that the company is trying to reposition itself with a focus on a smaller footprint. The concerted effort is a clear indication that management does not have confidence in the status quo. I don’t mind management tweaking things a bit, but I would prefer that the company focus on crushing the competition with more of the same big box approach to things.
Big changes signal big trouble and I would sell Best Buy as a result.
The Gap (NYSE:GPS)
Fashion trends are fickle. When those trends change and companies fail to adjust trouble usually follows. One of the best retailing names in the business had been The Gap (NYSE:GPS), but recently the company is struggling to keep up with the market.
Perhaps it is time to admit defeat as nothing is permanent and all good things must come to an end. In addition to Gap having trouble growing its business are higher textile costs that will surely eat into profit margins. This double whammy already has the stock trading lower and Wall Street analysts rushing to reduce future earnings estimates.
Strong retail sales in June helped Gap recover about a dollar per share of lost value. Sell into the strength and protect yourself from another drop. Short interest in the stock is approaching 10% of outstanding shares and rising.
Staples (NASDAQ:SPLS)
Economic recovery has been elusive for small businesses. It is no wonder that unemployment remains stubbornly high when this important segment of the economy struggles. Until things change, unlikely in my opinion, companies serving this market like Staples (NASDAQ:SPLS) will likely remain under pressure.
Staples reached its 52 week peak at the start of this year. Since that time it has been all downhill. Shares are down 31% year to date making the stock one of the worst performers in the market. I don’t see things changing.
Some may see value in Staples given that shares now trade for only 11 times current year earnings estimates. I see Staples as a retail stock value trap based on the fact that the company has missed estimates in each of the last two quarters. Once a trend starts it is likely to continue.
