The Week Ahead: 3 retail stocks poised to move
Posted
Aug 15 2008, 05:01 PM
by
Andrew Horowitz
Rating:
Is this rally for real? An 8% rise since mid-July has the S&P 500 resting on both the first step of a Fibonacci retracement and its 50-day moving average. Oil has been plummeting and the dollar has been strengthening while financials have seen a nice bounce. Still, the underlying fundamentals for the markets haven't changed in a way that gives me confidence that we're out of the woods.
Next week’s earnings will give us a further glimpse into just how bad things are for the consumer. Here is an inside look at some of the more significant positions, along with 3 stocks you may want to research.
Monday, August 18
There is an awful lot of confusion facing investors in the commodity markets. Whether it is corn or wheat or even oil or copper, the extraordinary price movements have been reflected well by the share price of BHP Billiton, which has seen its shares rise to a high of $95.61 and now down to a six-month low of $65. The company is engaged in the mining of copper, iron ore, aluminum and coal and has seen its earnings estimates tightened as sales have contracted. Relative strength of the shares has been dropping because the industry group has performed horribly. Just as fast as it was in favor, it is suddenly out of favor and analysts are looking for… wait a minute, there are no quarterly estimates currently available on any systems that I use for research. Hmmm...If you know anything, please let me know.
Tuesday, August 19
Since there are so many retail companies reporting over the next few days, here's a consolidated list of estimates and very brief comment on what to look for. This should give you view a much better overview to help with your weekend research.
Home Depot - Quarterly estimate $0.61 on $2.05 billion of revenue
Shares have been recovering nicely from a huge dip as the consumer was thought to be absent from stores. Management has initiated a significant corporate makeover as they saw spending slowing on large ticket items. These days, homeowners may believe that the perfect solution to their housing woes is to fix up the old money pit instead of moving. Shares have been strong and look like they could break out on earnings.
Saks - Quarterly estimate ($0.19) loss on $679 million of revenue
Consumers have been opting for lower-cost alternatives and essentially been penny pinching in every sector. If you think about that, Saks doesn’t meet the standards of a frugal penny pincher. While we have recently seen a double bottom technical pattern, growth rates and outlook are not strong and I recommend keeping your distance, for now.
Target - Quarterly estimate $0.76 on $15.47 billion of revenue
Opposite the Saks story, Target should benefit from the trend of cost-cutting by consumers if they can find a way to compete effectively with Wal-Mart. Shares have bounced off their lows nicely and are challenging their moving averages both on a 50-day and 200-day basis. While the growth rate has been decent over the last few years, it hasn’t kept pace well with many of its direct competitors. Institutional owners have been backing off as well.
Hewlett-Packard - Quarterly estimate $0.83 on $27 billion of revenue
Relative strength is up, shares have been moving higher and earnings have been consistent. The big wild card will be the international component that has shown to provide significant upside to other companies in the technology sector. Recently, Hewlett-Packard has seen stiff competition from Apple and I would expect that it will tough for them to significantly beat estimates this time around.
Wednesday, August 20
BJ’s Wholesale - Quarterly estimate $0.57 on $2.6 billion of revenue
Here’s a company that qualifies as a deep discount supplier and investors have liked what they have seen from the company. Over the last several quarters we’ve seen a dramatic shift in the earnings momentum as sales have been growing. Institutional ownership has also grown and management has recently increased their outlook.
Hot Topic - Quarterly estimate( $0.02) loss on $166 million of revenue
If you've been to a mall recently, you’ll notice that Hot Topic has been one of the many stores that is quite empty. The concept of offering pop culture and Gothic-wear in all size groups seems to have lost its appeal. Growth is sinking along with the share price and a loss this quarter seems inevitable.
Limited Brands - Quarterly estimate $0.20 on $2.3 billion of revenue
Once a very well-run company with great growth trajectory, Limited has lost its way. Whether competition is blamed or not, the shares have been held back in the current market environment. Debt is high and sales are decreasing so a profit of $.20 a share as estimated will be hard to imagine.
Thursday, August 21
Children’s Place - Quarterly estimate ($0.43) loss on $339 million of revenue
Staging a remarkable recovery after the new CEO was appointed at the end of 2007, here is an example of what cost-cutting and a change of direction can do for an ailing company. Up over 100% since its low at the beginning of this year, it looks as if earnings are starting to make a turnaround and new management has shown an ability to turn things around. Analysts are expecting a loss of $.43 a share, but I wouldn’t count this one out. As a matter of fact, if shares can break through the $30 resistance point it may be ready to make a secondary move towards its gap breakdown around $50.
Gamestop - Quarterly estimate $0.28 on $1.6 billion of revenue
Clearly in a recent downtrend, Gamestop is not to be dismissed. The company has been able to effectively leverage the various gaming platform sales. Certainly competition has been fierce from several of the major consolidators and discounters, but shares are starting to show signs of movement. A tight double bottom and bouncing off support of $38.50 now has shares consolidating at $43. If earnings do not come in well, downside could be 10% or so. If the company actually surprises, the upside could be 20%. Earnings growth is strong and even after I recently wrote that shares could be in trouble in a TopStocks post on May 16, it is looking like we could see a change of direction from here. If you had shorted shares on my last recommendation, you would now have a healthy profit approaching 20%. I would look to enter a trading position long, possibly with a covered call to mitigate downside. Watch the MSN Strategy Lab for more details.
Gander Mountain Sports - Quarterly estimate ($0.06) on $268 million of revenue
This chart is a classic example of what we would call a tailspin. Down 70% from its 52-week high, it would be difficult to find what good could come out of this earnings release except for the potential for a quick and sudden bankruptcy hearing. Watch out as this is not looking healthy from this vantage point.
Patterson Companies - Quarterly estimate $0.39 on $755 million of revenue
If you like your teeth and your animals, Patterson may be a stock that is right for you. Sales have been growing at a nice pace and the shares have held up quite well into this recent economic downturn. The recent technical pattern indicates that a potential break above the 200-day moving average of $33.50. If successful, shares could propel up to the next resistance point over $37. If the company is able to beat the estimates, we could see a quick move higher.
Aeropostale - Quarterly estimate $0.31 on $375 million of revenue
Even into a market that has been brutal to most retailers, there are a few that stand out. Here’s one that has seen a significant rise in institutional ownership and earnings that have been relatively stable, considering the mess that we have seen. Sales have been growing steadily and shares have been ready to break out since they touched their key resistance of $36. Showing a very nice technical pattern along with excellent fundamentals, here is a stock you want to look at closely as management has recently announced that they are expecting earnings to be above prior guidance.
Zumiez - Quarterly estimate $0.07 on $92 million of revenue
I’ve been following the plight of Zumiez since the high of $54 to its current resting place approaching $15. What originally seem to be a solid thesis showing that the age group this store targeted would continue to buy the product line that was sold should provide a decent return through varying market conditions has turned out to be an unmitigated nightmare. Shares broke down dramatically in November and have continued to slide. Sales have softened and earnings have slowed as it has become painfully obvious that an economic slowdown was much harder on retailers that had a specific focus over those that had a broad-based appeal. If the company is able to pull a rabbit out of its skateboard, shares could quickly move back towards $20. If not, it will stay at this level for while as expectations are low into the near future.
Friday, August 22
Ann Taylor - Quarterly estimate $0.48 on $622 mbillion of revenue
Ann Taylor stores have been drifting lower sinking as they’re going through a restructuring. Management has been looking for ways to enhance shareholder value and while EPS has been relatively stable shares still a 41% from its 52-week high. Considering the market, economy and competition it is hard to imagine how a store with such a narrow focus will be able to beat estimates and grow in this environment.
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Disclosure: Horowitz & Company clients may have short and/or long positions in securities mentioned as of the date of publish.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
