At present the markets are apparently in a valuation correction mode. Not that PE’s are so terribly high – it’s more that future earnings are a major concern. Taking this into account, the market is reacting to a possible earnings downgrade to some retail stocks in particular. For several months now, we have been warning about Starbucks (SBUX) being overvalued.
There are two factors at play. First and foremost is general uncertainty regarding the well publicized U.S. economic slowdown. Bernanke recently reiterated this generally accepted phenomenon and labeled it a ‘consumer slowdown’. Hence, retail stocks are taking a hit.
The second factor is consumer trends. Retail is notorious for changing direction overnight. Not long ago, several major league players got it wrong and paid dearly for their miscalculations. In the U.K., apparel retailer M&S was in the doldrums for years and just couldn’t seem to get back on track. Now M&S is in fashion again.
The market has a tendency to overshoot in both directions. The U.S. slowdown will not be as severe as the market reaction, which will result in investment opportunities. As for retail in general, markets have been pretty good in predicting imminent trend changes.
Retail stocks in your portfolio that are trading in accordance with the ‘earnings factor’ will bounce back in the near future. Q2 earnings coming out indicate that earnings growth has not fallen below 7%. The bears are heading back into hibernation. The bears will most likely try again just prior to Q3 earnings season and undoubtedly will be thrown back into an extended winter slumber.
As for retail stocks that are trading down due to genuine fundamental concerns – well, you know what to do… don’t bear it – sell it.
Disclosure: This is the opinion of a CrossProfit analyst and may not be the consensus of the CrossProfit analyst/research teams.