Tag Archives: RTH

A Massive Bubble In Retail Stocks

Retail, especially the “concept” retailers, are going parabolic. It makes no sense given the declining rate of personal consumption, retail sales, etc. The kinkiest names like RH, RL and W are going up like the dot.com stocks went up in late 1999/early 2000. The move in these stocks reflects either mindless optimism or momentum-rampaging by hedge fund bots – or both. The hedge fund trading flow can turn on a dime and go the other way. I suspect this will happen and, as it does, squeeze even more mindless optimism out of the market.

The cost of gasoline has to be hammering disposable income for most households. On top of this is the rising cost of monthly debt service for the average household.  Non-essential consumerism is dying on a vine.

Fundamentally the retail sector is not recovering. If anything, the economic variables which support retail sales are deteriorating. I think some of the shares caught a bid on better than expected earnings derived from the one-time bump in GAAP non-cash income from the tax law changes reported by numerous companies in Q1. I just don’t see how it’s possible, given the negative wage, consumption, credit and retail sales reports that the sector has “recovered.”

In just the last eight trading days, XRT has outperformed both the Dow and S&P 500 by a significant margin. It has all indications of a blow-off top in process. You can see that, with industry fundamentals deteriorating, XRT’s current level now exceeds the top it hit at the end of January, which is when the stock market drop began. The RSI has run back into “overbought” status.

Some of the “kinkiest” retail concept stocks, like Lululemon (LULU), Five Below (FIVE) and Restoration Hardware (RH), soared after reporting the customary, well-orchestrated GAAP/non-GAAP earnings “beat.”  Of course, RH’s revenues declined year over year for the quarter it just reported.  But it used debt plus cash generated from reducing inventories to buyback $1 billion worth of shares in the last 12 months.  Yes, of course, insiders greedily sold shares into the buybacks. (Note: If insiders were working for shareholders other than themselves, companies would pay large, one-time special dividends to ALL shareholders rather than buyback shares to goose the stock price)

The retail stocks are setting up a great opportunity for bears like me to make a lot of money shorting the most egregiously overvalued shares in the sector.  Timing is always an issue.  But complacency has enveloped the stock market once again, as hedge funds have settled back to aggressively shorting volatility.

It won’t take much to tip the market over again.  Only this time around I expect the low-close of February 8th (2,581 on the SPX) to be exceeded to the downside by a considerable margin.

The above commentary was partially excerpted from the the latest issue of the Short Seller’s Journal.  It’s not easy shorting the market right now – for now – but there have been plenty of short-term opportunities to “scalp” stocks using short term puts. I cover both short term trading ideas and long term positioning ideas.  You can learn more  about this newsletter here:  Short Seller’s Journal information.

 

Short Seller’s Journal: L Brands Is Extremely Overvalued

I am getting ready to launch a weekly commentary/investing/trading service.  The stock market is now more overvalued than at any time in history, especially when reported earnings are re-adjusted to peel away all of the non-cash fluff companies are now permitted pile into their GAAP and “Non GAAP” numbers.  It’s become a complete joke.

But this “legal” fraud has created an unprecedented opportunity to benefit from the eventual stock market collapse and make a lot of money from all the overvalued stocks that litter the stock market.

In addition, the precious metals sector – thanks to the extreme degree of Central Bank intervention – has become one of the best fundamental value/contrarian opportunities that we’ll see in our lifetime.  The mining stocks have never in the history of the stock market been cheaper in relation to the price of gold/silver.  There’s a literal sunken treasure trove of junior mining companies with highly economical gold/silver deposits and the ability to survive the downturn.  When this turns, these companies will take off the way the internet stocks took off in the late 1990s.

My newsletter will focus on short-sell ideas in the areas of the market that I believe are the most highly overvalued, like housing, retail and financial services and on the mining sector.  The reports will include a brief summary thesis on the stock ideas presented.  It will also include chart analysis, trading suggestions and suggested options strategies.  The newsletter will be an abbreviated version of my full-blown research reports.  You can access an example of what will be produced on a weekly here:   Short Seller’s Journal – Retail.

Here’s one example of an idea I will be presenting.  This analysis was submitted to Seeking Alpha this past week.   L Brands Is Extremely Overvalued 

The stock is priced for perfection; Aggressive debt issuance to finance share repurchases and dividends;  A stock valuation far in excess of industry peers; Heavy insider selling…One of the likely big drivers pushing LB’s stock price higher is the company’s aggressive share buyback program. The primary source of funds being used for this is debt issuance.

Ultimately, in the event that LB’s stock “re-aligns” with the valuation levels of its peers and with the S&P 500/XRT, I believe LB’s stock could potentially be cut in half from its November 27 close of $96.68.

One last idea to reduce the risk involved with outright shorting LB would be a pair trade in which the short in LB is paired with a corresponding long position in either XRT or the Market Vectors Retail ETF

There’s more on L Brands, including some graphs and a paired trade idea here: LINK

BlogLOGO_retail

Was Black Friday A Bust?

“We believe Thanksgiving shopping was a bust,” said analysts at SunTrust Robinson Humphrey in a note. They conducted channel checks in the New York metro area, New England and the Southeast region starting on Thanksgiving Day and throughout the night into Black Friday.  LINK

Retail sales fell .9% last December.  Currently the trend is not the friend of the consumer retail sales bulls (click on image to enlarge):

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SunTrust retail analysts are already declaring Black Friday to be a bust.  Of course, our first clue this was coming was when the “Black Friday” sales events started two Mondays ago.   Anecdotally, I did some “boots on the ground” due diligence today (Black Friday) and found the stores to be eerily quiet.  And Denver is considered to have one of the healthier regional economies.

The bottom line is that the consumer is tapped out.  Obamacare premium rate hikes are starting to show up in mailboxes and that should really put a damper on holiday spending plans.

I have a new research report format that I am going to transition into a monthly newsletter service. The reports will have a couple ideas for making money – mostly by shorting or buying puts.  My first report featured two retail stock shorts.BlogLOGO_retail  One of them reported last Tuesday and anyone who read my report and shorted this stock ahead of the close on Monday (November 23), made a quick 16-20% the next day, depending on when and if they covered:

Untitled2This stock still has plenty of downside left, as it sells into the middle/lower-middle income demographic, which has been particularly squeezed since the 2008 financial crisis.

My second idea in this report will release its earnings next Thursday (December 3).  This stock, in my opinion, has a very high probability of missing its earnings and doing the “earnings miss” cliff-dive. Untitled3 It also has active options and my report has suggestions on using puts to play this stock.  It sells into the late teen/early 20’s demographic primarily – you get the idea:

I think this stock could easily drop 12-15% if it reports an earnings miss next Thursday.

You can access my report on these two stocks here:   Short Seller’s BlogLOGO_retailJournal – Retail Stocks  This is a new 2-page per stock idea format, with an overview of each company, reasons why I think the companies will miss earnings and why they make excellent risk/return short term trades or longer term short positions.

 

Take Advantage Of Falling Retail Stocks With My New Report Format

Note:  In response to high number of inquires, I will soon be introducing the Short Sellers Journal newsletter service.  In conjunction with this, I’m adding a new report format to my research report offerings.  The new format will feature a much shorter, summary format.  It will combine some fundamental analysis with chart/technical analysis and trade idea summaries.  All ideas will include suggestions for using options if the stocks have somewhat liquid options available for trading.

My debut report feature two retail stocks that I believe could gap down when they report earnings.  One company reports this Tuesday (November 24) and one reports on December 3.  Both stocks have not sold off recently with the sector and both are excellent longer term short sale plays to take advantage of the high likelihood that retail sales are going to disappoint expectations over the holidays and next year.

Let’s face it, the consumer is largely tapped out and overburdened by debt.BlogLOGO_retail

You access this report by clicking on here:  Short Sellers Journal/Retail Stock Ideas or on this graphic:

One company caters to the middle/lower middle income demographic and its sales have been flat for three years.  The second company caters to the teen-mid-20’s demographic and has seen declining sales and operating income.

Best BuyAlthough several large retails who have reported recently have experienced “cliff-dives” in their stock price after missing or barely making their earnings and revenue numbers, the RTH and XRT ETFs have yet to reflect the earnings recession invading the retail sector  – the pic to the left shows what happened to Best Buy when it reported last week, for instance.  This means there’s some stocks that have “cliff-dive” earnings events coming.