Stocks to watch: Size matters, but does Sears?
Posted
Aug 22 2008, 08:01 PM
by
Andrew Horowitz
Rating:
Fed Chairman Bernanke confirmed what everyone's been thinking about the markets, saying the "crisis is softening growth, raising joblessness, and the Fed’s job is one of the most challenging in memory".
He believes that the recent trend of the dollar will likely slow inflation but that U.S. growth would fall short of potential for a time, which will help curb inflation. That sounds like the Fed believes that companies will have their work cut out for them.
The market seemed to like what he said. But what can we expect to see from companies reporting in the coming week?
Monday, August 25
Honestly, of the four companies reporting today, there is not much to be excited about. How about we all go to the beach and rest up for Tuesday?
Tuesday, August 26
Chico’s is one of my favorite companies. Before you skewer me on this, you should know that it is not because of anything financial. It is simply an interesting company that has the ingenuity to change the rules. Where else can you find dresses that fit mature, full-figured woman that sports a tag stating it is a size 3? I mean, it must feel good to come out of the store with a shopping bag full of clothes that are a size 1, when you are usually a size 12! Maybe you can fool a few with this maneuver, but Chico’s has no one fooled by their financial performance. Sales growth is non-existent as are the prospects for a recovery. The retail story is the same for this company as shoppers are opting for Wal-Mart and Target over specialty stores. EPS estimates are coming in at $.03, a 80% reduction from the same period, a year ago.
Want to buy a chicken? How about looking at a company that we have been watching (and investing in) for some time? Sanderson Farms is one of the few remaining poultry manufacturers in the U.S. Shares have been closely correlated to the price of corn and as we have seen a significant drop recently, they could actually surprise to the upside as the last estimate is based on a much higher feed price. Sanderson also scrubbed a plant build-out as they saw their margins dropping. Management does a good job at looking forward and estimates are for a flat quarter, a drop as compared to the $1.51 earned last period. See more info about my initial views on SAFM, here.
Wednesday, August 27
Back in June, I recommended a position in Greif, a company with solid footing in the packaging business. That was when shares were at $64. We subsequently sold the position at $72 and as the market slid, so did this stock, down towards $55. This company has had a solid history of growth and has a PEG ratio that shows that shares may still be undervalued. Even though shares have been volatile, institutional ownership has grown and analysts are expecting that earnings will once again come in at $1.13, above last period’s $0.90. Also, shares recently surged above the 50- and 200-day moving averages as shorts may be covering prior to earnings.
Thursday, August 28
The poster child representing a bad real estate market and the retail sector’s misery has to be Sears. I recall an analysis that I wrote almost a year ago when the stock was trading close to $125 per share. I received a ton of hate mail as I argued that Sears was ready to fall. It seemed to be clear that shares would drop as real estate valuation had been such an important part of the company's valuation. Fall they did and now shares continue to be in peril of dropping further as consumers have been spending less and what they are spending, they are doing elsewhere. Analysts are showing an estimate of $0.33 per share profit for the quarter on $11.7 billion of revenue. Be aware that short interest is at 21%, with almost 10 days to cover. I would not be surprised if there are a few up days prior to the announcement. (See Sears – Valuation in Focus)
Friday , August 29
Force yourself to go to the beach again. Take in the last few days of summer because only a few reports are due out today. You deserve it anyway, right?
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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.
