“Retailers are one of the few sectors that appear to be pricing in the fear of a recession.”
-Bill Nygren, manager of the Oakmark Fund (OAKMX).
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Are the Retail stocks bargains?
That’s the question Jacqueline Doherty asks on this week’s Barron’s.
Given the recent Retail sales data, that question is especially relevant. Add to it the under-performance of the sector (see nearby chart) and you have the makings of either a great buy — or a value trap.
As we noted earlier this week, October Retail sales were disappointing with what little gains there were mostly attributed to Food Inflation. It was no surprise to learn that Consumer Sentiment had dropped to a 2 year low.
However, that’s become well known. In theory, this should be already reflected in the stock price:
“A NUMBER OF VALUATION METRICS are signaling that retail shares are attractive. Multi-line retailers in the S&P 1500 sport P/Es based on future earnings that are 0.9 times the broader index’s, notes Brian Rauscher, director of portfolio strategy at Brown Brothers Harriman. After the dot-com bubble burst in 2000, retailers sold off until their multiples were 0.7 times that of the broader index. Typically, they have peaked when multiples reach 1.2 times that of the S&P 1500 . . .
[Bill Nygren] believes that the shares are more attractive than other stocks, including many in the materials and technology sectors, whose still-lofty prices reflect little risk that the economy will stop growing. Retail stocks would outperform in a recession, he maintains, and could rally strongly if the economy keeps growing.”
To adequately answer the question, we have to look at several variables, and correctly assess how they will develop over the next few quarters. Then we have to guesstimate how much of these elements are already fully reflected in stock prices:
1) Will energy prices stay high, or will there be any relief in 2008?
2) How much of the weak sales is legitimately attributable to warm weather?
3) Is hiring likely to improve? Will incomes and wages increase over the near term?
4) If not, will Consumers have access to ready lines of credit to fuel further spending?
5) Will the economy dramatically slow? Will we slip into a mild recession — or something worse?
and the money question:
6) Will Retail stores be able to maintain their pricing margins AND their sales volumes? Are deep discounts likely this holiday season?
Barron’s adds this ominous notes: “Wal-Mart began offering bargain buys three weeks earlier than it has in the past, and Best Buy isn’t far behind, having announced plans to lure its best shoppers with weekend specials.”
Many of the stocks in this space have been hit — but not brutally so. Macy’s (M) is down 22%, Nordstrom’s (JWN) off -34%, Saks (SKS) down 12%. Costco Wholesale (COST) is down -26%; Coach (COH) is down 25%.
Yet much of the sector seems to be holding up okay: Costco Wholesale (COST) is up 26%; Target (TGT) is practically flat, off just 3%. For all my whining about energy prices, Wal-Mart (WMT) has fallen a mere -6%. And Best Buy (BBY), whose fortunes appeared tied to Housing, is also down just -6% ytd.
This is only a guess on my part, but it does looks a bit early to be making a contrary bet on Retailers — especially if Food and Energy prices stay high, or the rest of the economy continues to cool.
chart and table courtesy of Barrons
Source:
Combing Through the Bargain Bin
Jacqueline Doherty
Barron’s, Novermber 12, 2007
http://online.barrons.com/article/SB119465874882288793.html
I’m starting to wonder if the bubble that started to develop in the stock market last year is unwinding now? If so, this would bring the market down quite a bit more. S&P 1350 would be a good floor, if true.
On the other hand, this would be a complete burst. Gold would fall back down to maybe $600. Oil would fall to maybe the $70 range.
To the good, the money that propped up this bubble would not evaporate. It would be soaked up by treasuries. After the panic passes, it would come back out to prop up another cycle.
Since the bottom does not appear to be in sight and credit is going away, I’m looking for a nice, somewhat deflationary, drop. Similar to the one in 2006.
After the burst, expect Europe to lower rates.
With copper falling from $3.50 to 3.14 in a couple of weeks and the yen trading in the 110 range, this is a freefall. Next week should be even more spectacular than this one.
There might be a fool’s rally next week or the week after next, though. The Elliot Wavers love this one because it appears to validate their theory. Historically of recent date, there is usually a rally in the middle of a large drop off. It often appears to be in the midpoint of the drop.
I’m hoping that it bottoms before the end of the year.
I believe COST is up 26%, not down
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BR: Good catch — I’ll fix above
This is a consumer-led recession. There is a credit mountain that is imploding. Retail Sales to be reported this week will be soft.
The market will probably ignore it and rally the stocks(from an oversold position). Any rally, especially in the discretionary sector, should be sold.
I hope you benefited from my short-term SELL signal given just before the Fed’s meeting.
According to one analysis, my site comes up as the top daily market timer by a “huge amount” compare to 12 of the “best in the business”.
Nygren is a bit like Jimmy Rogers. Smart as hell and usually right, but often dangerously EARLY in the call. That is where charts come in handy. Why try to pick a bottom in retail???? Wait until the bottom is in and trail a tight stop in case it is short covering and not a real rally.
The more I study the markets the more I appreciate Rothchild’s other less famous quote: “I never buy the bottom, and I always sell too soon.” Wow, think about the risk/reward in that statement. That’s how you make money, if you can do it consistently. Cheers all.
Where is a bargain ? A plea yes
FSO Editorial No Recession in Sight by Paul Kasriel 10-15-2007.htm
When reading above study and looking at charts 5/ 6 one may not see too much breathing space for increased consumption, the proponents of lower interest rates may even not see through as a plea for an interest cut either.
The credit cards business of the banks is suffering from higher delinquincies.
The consummer credit is 125% of GDP in USA and 100 % in Europe.
All seems to be a Level 3 assets allocation
“Wal-Mart began offering bargain buys three weeks earlier than it has in the past, and Best Buy isn’t far behind, having announced plans to lure its best shoppers with weekend specials.”
Whoa, Barry. I thought you said we had high inflation? What’s with all these “bargains” and “weekend specials?”
Riddle me that.
Nygren is a legend and I wouldn’t want to have to argue the point with him, but in this case (as in most) I would have to agree with Barry. We have only just started to see layoffs, high gas prices, etc. take effect, and that cycle is likely to be a long one, IMO.
The other thing about Nygren is that he has not exactly covered himself with glory this year in his Select and Global Select funds. He had to send an apology letter to clients about third-quarter performance because of the huge position in WaMu. Aftet this week, his continued support for that stock is beginning to look almost Ahab-like.
It’s an interesting question – how long do you stay with a manager with such a great long-term record, when you:
1.) Disagree with his assessment in the short-term, but
2.) Don’t know if it’s still in the fund, and deeply respect the longer-term history?
Sorry for the rambling, too much cappuccino this morning.
muckdog: I think we have long established that inflation (via pricing leverage) is mostly in necessities, and nonessential items take the brunt.
Now of course to which degree something is a necessity varies between individuals (and businesses), but there are some common patterns like food, shelter, utilities, transportation, mandatory insurance, healthcare, etc.
And even outside the realm of necessity, people are exercising their preferences. In addition there is the effect of market saturation — at some point all those who “count” (i.e. who can afford it) are adequately equipped in some product category, price leverage in that category goes down.
Nygren: I had a bunch of Select, which I dumped early this year out of concerns that Bill had “jumped the shark”. He continued to hold lots of WM at that time– he must not read the Big Picture. He was BUYING Dell– a doomed company. And there was another ne– maybe AMD? — that I was in serious disagreement with.
I don’t do mutuals any more; I can make my OWN mistakes. My 2006 Roth: AAPL, CAJ, T, DUK. $$-wise, I’m up over 50% so far, since March– though two iof the stocks went down.
Excellent post, thanks. A really good & useful comments – really add to the discussion. Many thanks.
To add my two bits think you need to take the above comments about the slowmotion slowdown and marketing positioning/timing (sell rallies)+ WAIT for bottom on technicals – my interp) and add a key thing. Take the Retail analysis down a level to the Industry/Firm level. The Retailers that are doing well are either a)not in dept.stores and similar sectors where there is a long-term secular downtrend due to breakage in their business model or b) particularly firms that have a solid business model, demonstratable value pop and excellent execution of same. Cases in point are Costco which has gone thru some major troubles over the last couple of years but is firing on all cylinders. Or TGT which has created a whole new higher-value, service-oriented valu prop and put the beef behind it. When those guys feel some pain and the sector bottoms they’ll great buying opps. Similarly analysis applies to other sectors.
Aren’t the Rothchilds near the bottom point of the diamond (old money side of the pyramid) iceberg. Term trickle down really applies this side.
Nygren is much loved particularly by Morningstar but I cant figure out why. He has underperformed the market for the last five years. Considering that he is a value manager and value outperformed during that period his record is particularly bad.
I almost never hear it mentioned, which is astounding, but if the situation in Iraq actually does stabilize and an oil-sharing process is established, wouldn’t that have a significant impact on oil prices? As to inflation, I noticed that IBD has raised the newsstand price of the Weekend/Monday Special to $2.50 — a whopping 25% increase. Guess O’Neil isn’t wealthy enough yet, or else he’s girding for the tax hell he’s always carping about.
While the trinkets you can live without at Walmart might be on sale, the cost of food you do need, and the gas you gotta buy to get there, is spiraling upwards at a rather incredible rate.
When our Canadian dollar hit 1.10$ I decided I should go on a buying spree. I was quickly faced with the fact that everything I want comes from Europe.
Ironically, the only way retail is a bargain is if the recession call is wrong. Otherwise, in a consumer led recession, these go lower because they don’t just have to fear hard times, the have to actually experience a soft holiday, slash prices and reduce costs so they are ready to take advantage of a recovery.
I wouldn’t be jumping in front of these things even if you think (as I do) we are only in for a soft quarter or so. But the higher end stuff, maybe. (Although I wouldn’t go near Sotheby’s with a 10′ pole, antique or otherwise.)
Since I am definitively not very good at picking reversals, I tend to prefer growth over value. I found that in most cases what is weak gets weaker and what is strong gets stronger. And the weakest of the weak simply disappear at times.
That is dramatically different at reversal points of course. But as I said, I am unable to predict reversals.
So, at this point in time I prefer foreign stock indexes (ETFs) over retail. But also those indexes got hammered a bit over the past few weeks.
The USD factor is important. Between higher costs imports from floating rates countries and the risk of revaluation and/or protectionism for peggers, the risks to margins for US facing retail are large.
Another factor is likely to be a stalling out of retail space productivity. Retail development follows housing, and has long lead times. Retail space development is showing tentative early signs of slowing, but much of what’s in progress will have committed long term leases predicated on continued housing growth patterns. These patterns have clearly stopped working, but the trajectory of development will overshoot, probably badly.
I’m a huge longer term bear on retail, but I think the current selloff is overdone. Things aren’t as gloomy — yet — as these stocks are showing. This Christmas can actually turn out to be ok since your average american is still fully employed and hasn’t felt the effects personally of the credit crunch — yet.
I also suspect we will see a sharp selloff in oil over the next few weeks which when combined with christmas and colder weather could give these stocks a nice short squeeze into the end of the year.
Ironically, the only way retail is a bargain is if the recession call is wrong.
IMHO, the recession call is wrong. Therefore, retail must be a bargain!
Muckdog:
I agree, I don’t think there will be a recession either. It won’t get that bad. I was merely noting the irony. In any case, I am not comfortable picking bottoms. When retail shows strength then maybe I’ll get into it, but not now.
Are you David Kneale from CNBC Muckdog?
Where is the consumption going to come from?
ie…what replaces the major real estate engine. Credit engine whatever you want to call it.
Where is the investment going to come from?
Please Please don’t say the cheerleading rant of the pump monkeys claiming the global growth will save us. The exports will save us.
Give me something. Why are things going to be just fine? I mean I really want it to be okay but I don’t see it.
Where is the consumption going to come from?
Probably from all the shoppers those of us commenting on the thread saw today at the stores/malls/restaurants. Maybe it’s the rising wages.
Is that it,..your answer?
You sound like the housing bulls last year claiming real estate never goes down. Uh Oh guess it does.
Please though, tell me how GDP doesn’t take a hit when when Benny states housing won’t recover for 6 months(I think longer), credit any easy money is…gone. Foreign ivestment…maybe,…but weak ass retail….no friggen waay.
But your right, I imagine the numbers will come out that we are fine like the employment numbers and wage numbers that all have been manipulated to the point they are useless.
Look, don’t listen to me. Listen to your family who shop ie…wife, daughters, mothers in your circle to get a handle on retail. We all make good money in our circle and we are all cutting back. What about the people who don’t make good money?
Look, I understand you trying to protect long positions but don’t miss the elephant in the room. No way retail holds up to a collapsing housing market,…I mean dropping off a cliff housing market!