Positive Surprises for Retailers

The retail sector has been lagging the overall market by a wide margin over the past year. The SPDR S&P Retail ETF (NYSE: XRT) is down over 20% while the S&P 500 is up just over 2% in the past year. Despite the lagging performance by the retail sector, we have seen some big moves to the upside by some widely held retailers after their earnings reports.

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Walmart got the retail earnings season started back on August 15 and the stock jumped 6.1% that day. The company beat the EPS estimates and it also raised its forecast going forward. Home Depot reported earlier this week and the company beat on its EPS estimate, but missed its revenue estimate and lowered guidance on trade concerns. Despite the lower forecast, the stock jumped 4.4% on the day.

Home Depot’s biggest competitor in the home improvement segment also reported this week and Lowe’s delivered strong results for the quarter. The company beat on both the top and bottom line and the stock jumped 10.35% on Wednesday.

The biggest surprise and the biggest move came from Target. The company beat its EPS estimate by 12.3%, it beat its revenue estimate, same-store sales were up more than forecast, and it raised its forecast for the third quarter. The stock jumped 20% on Wednesday as a result of all the positive news.

Of course, there have been disappointing results in the sector as well. Macy’s reported on August 14 and the results were awful. The EPS came in 37% short of estimates and that sent the stock down sharply. Tapestry, the owner of such luxury brands as Coach and Kate Spade, reported on August 15 and the stock fell 22.2% that day. J.C. Penney also reported on August 15 and it disappointed as well. Of course, Penney’s stock has been beaten down to the point that it is trading below a dollar.

As I stated before, the retail sector has been performing poorly for the past year and I think that actually helped lower expectations ahead of the earnings reports. When expectations are lower and a company beats its estimates, that’s when you see big jumps in the stock price like those we have seen from Target, Lowes, and some of the others.

Last week I was asked to appear on Cheddar TV for an interview about retail earnings. There were two themes that I pointed out with regard to the reports that had been released at that point. First, discount stores like Walmart had been doing better than high-end names like Macy’s and Tapestry. The second theme ties back to an article I wrote for Bull Market Rodeo earlier this month. The stocks that were beating estimates and moving higher afterwards were among the top companies before the reports. My article from August 6 was titled, “Is the Cream Rising to the Top this Earnings Season?”

In the article I pointed out how the companies that seemed to be doing the best this earnings season were already among the best in terms of their earnings growth, sales growth, and stock trending higher. I even pointed out some of the stats from Investor’s Business Daily. This is not a paid endorsement for Investor’s Business Daily, but I am a subscriber and have been for a number of years. With my previous article in mind, I put together the following table for the retail names mentioned above.

I arranged the stocks according to IBD’s Composite Rating which combines the EPS rating, the Relative Strength Rating, and the SMR Rating along with a few other items. As you can see, the stocks with the highest composite ratings are clearly performing better than the ones with the lowest composite readings. Granted, I did get these measurements after the earnings reports and that has impacted some of the ratings, but I can also tell you that the Composite Ratings for Target and Home Depot were at 90 and 91 before the earnings reports. Lowe’s was at 59 and Walmart’s was at 78. As for the big decliners, the only one I have the rating for before the earnings report is Macy’s and its composite rating was at 12.

I can also tell you that Tapestry’s composite rating was at 22 before the latest earnings report. I know that because I wrote an article for another publisher where I suggested readers buy puts (a bearish trade) on the stock. That article was posted on July 31.

Again, this isn’t an endorsement for IBD, but what you see is how you have to look at the whole picture for a stock. I frequently tell people that I analysis stocks, not companies. What I mean by that is that I look at what the company is doing in terms of earnings and sales growth, return on equity, and profit margin. I look at the chart to see if the stock is moving up and matches the fundamental performance of the company. By doing this, I feel like investors can avoid investing in companies at the wrong time.

I kind of veered off track from the original thoughts of this post, but I also wanted to show readers how analyzing stocks from different perspectives can help them make money.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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