Retailing ranks well among the industry darlings of the post-market rally since the March 9, 2009 low for the S&P 500. The past 12 months has seen a narrowing of the outperformance of the SPDR S&P Retail ETF (NYSEARCA:XRT) as compared to the SPDR S&P 500 (NYSEARCA:SPY). Investors looking for complementary ideas in retail may want to consider three candidates below, where analyst forecasts for earnings and revenues outpace the overall market, as well as possessing other attractive fundamental characteristics.
As seen in the chart below, the XRT's total return of 250% has outpaced the broader Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) return of 198%, and more than twice that of the SPY.
Though the past four years have seen outstanding returns, the past 12-month performance differential has narrowed, with the XRT up 13% in total return compared to the SPY's 9%. Wondering which companies within the XRT may carry stronger fundamental characteristics beyond the first quarter of 2013, we decided to examine all 96 companies in the Retail ETF for:
- Above-average top line revenue growth, and
- No bottom quintile (1-20 on a scale of 1-100) scores in 11 of StarMine's quantitative models, including those for analyst revisions, earning quality, price momentum, intrinsic and relative valuation, credit defaults and others.
After screening for these characteristics, we found three companies that passed: online travel companies Expedia Inc (NASDAQ:EXPE) and Priceline.Com (NASDAQ:PCLN) and shoe retailer DSW Inc. (NYSE:DSW).
First Hurdle: Above-Average Revenue Growth
While bottom line earnings growth is good, adding top line revenue growth is better. Analysts whose estimates in these areas have been more accurate are given higher weight via StarMine's SmartEstimate of both earnings growth (see table below, green columns) and revenue growth (blue columns). Using the SmartEstimate data for forward each company's 12-month revenue growth, we found that only 28 stocks cleared a 10% growth hurdle for the next 12- and 24-month periods.
Second Hurdle: No Low Rankings
Our second criterion is to make sure that no fundamental or other model ranks placed a company in the bottom 20% of all U.S. (or North American, depending on the model) companies, thereby seeking to avoid potential landmines. This hurdle left only three companies out of 28.)Click to enlarge
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Beginning at the bottom row of the table, the broad S&P 500 ETF shows the lowest forecast earnings and revenue values as compared to the Consumer Discretionary sector XLY, located directly above. And above the XLY, the retail XRT's revenue growth projections exceed both of the aforementioned ETFs. (Earnings growth may be less relevant for comparative purposes, due to extreme growth values of some XRT members due to low comparable values.) It should be noted that retail stocks have historically performed well in markets that expect the economy to expand, and vice versa; therefore any negative forecast perceptions may well change those estimates as quickly as analysts can change their forecasts.
The three companies have done well since the March 2009 market bottom, with DSW up 619% in total return (see chart, green line), Priceline.com up 727% (blue line) and Expedia up 750% (orange line).
DSW shows carries a strong ratio of cash from operations to average assets of 54% compared to the industry median's 27% and the sector median's 19% (October 2012 data is the latest available). Net operating asset turnover stands at 4.5 times, slipping 0.51 from the prior period, though this figure remains above the industry median of 4.0 and the sector median 2.1 values.
Expedia as well displays a strong ratio of cash from operations to average assets at 68%, contributing to a high 93 out of 100 StarMine Earnings Quality model ranking. Earnings Quality measures the degree to which past earnings may be sustained into the future. The company also scores a perfect 100 in the Profitability component of the SmartRatios credit Risk model, with strong ratios for return on tangible capital and net profit margins.
Besides avoiding model ranks in the lower 1-20 range, Priceline currently enjoys a tailwind of upward earnings and revenue projections in the past 30 days for this quarter, next quarter, this fiscal year and next fiscal year. Operating margins (green line with squares in the chart below) remain high, with the latest December 2012 data at 34.9%, and above the industry rate of 8.0% (green line near the bottom of the chart).
As the XRT's performance compared to the SPY the past 12 months has been slightly lower and slightly higher, the focus for some may well be to focus on the retail ETF as a whole, and more toward individual companies that may stand out. Here we have highlighted three companies with stronger than average forward forecasts along with model scores that avoid their placement in the bottom 20% of their respective country or regional peers. While these ranks can and do change, trying to put the odds in one's favor at the start of the analytical process may be a good first step.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.