Turning Point For Consumer Discretionary Sector?

by: David Brown

The S&P 500 seemed to hit a wall at 1800, retreating after the all-time, but rebounded to close only 0.38% down. It could be just a pause or it could be a bit more serious due the plethora of earnings reports this week from the Consumer Discretionary sector. Today, Urban Outfitters (NASDAQ:URBN) began what will be a veritable deluge of retail sector earnings reports this week. URBN beat on both top and bottom with double digit revenue growth from several of its key chains, Free People (30%) and Anthropologie (13%), beating earnings estimates by $0.02 and issuing strong guidance. The bad news is not only did the stock fall 1.3% today, but it is also down another 2.6% in the after market. Tomorrow, we get the likes of Best Buy (NYSE:BBY), The Home Depot, Inc. (NYSE:HD), The TJX Companies Inc. (NYSE:TJX) and Dick's Sporting Goods Inc (NYSE:DKS) before the market opens. During the remainder of week, we get Lowe's Companies Inc. (NYSE:LOW), J. C. Penney Company Inc (NYSE:JCP), Wal-Mart (NYSE:WMT), Foot Locker Inc. (NYSE:FL), The Gap Inc (NYSE:GPS), GameStop Corp (NYSE:GME), Ross Stores Inc. (NASDAQ:ROST), Pandora (NYSE:P), Staples (NASDAQ:SPLS), Target Corp (NYSE:TGT) and William Sonoma Inc (NYSE:WSM). That should paint the retail picture for us by week's end. Today we got decent results from Tyson (NYSE:TSN), but it was still down in the after-market. CRM delivered a rather shaky report, deserving its 3% fall during market hours and additional 1% fall after hours.

New highs were reached last week just about everywhere, led by Mid Cap Growth, up a solid 2.44%. Even the trailing style/cap small-cap value was up a full percent. The market showed strong bullish tendencies with growth leading value in each cap/style. The sector leaders were growth stalwarts Energy, Consumer Cyclicals, Healthcare, Technology and Industrials, all up more than 1.5%. But even Basic Materials, which was the worst, gained 0.3%.

Market Stats

It could have been a topping week with fairly strong volume and the myriad of new highs. A number of the economic indicators last week were a bit disappointing, led by Industrial Production off -0.1% vs. an expected 0.3%. Initial Jobless Claims were a bit worse than expected, and the Trade Balance was also worse than expected. Retail Sales on Wednesday may help point the near-term direction along with Leading Indicators on Thursday. But the bevy of retailer earnings reports along with management guidance should tell us how the economy is doing - and more importantly, what the investor reaction to it will presage near-term market behavior.

Keep in mind that the government shutdown loomed on the horizon during the end of the quarter and may have taken its toll on shopping enthusiasm. There are headwinds ahead as Congress resumes its gridlock. Perhaps the election results will stimulate a better attitude. We will see. With valuations up a bit more, it could be that at least a small selloff is due. Or Icahn's warning that what earnings growth we have has been (in his words) "due to the very low interest rates"… which will likely rise in months ahead, could stoke a full blown pullback.

Be cautious my friends.

3 Stock Ideas for this Market

I selected the following stocks from a custom search looking for undervalued growth stocks with recent upward analyst revisions in MyStockFinder (*all data below from Yahoo Finance):

Blackstone Financial Group LP (BX) - Financials

  • Trading for 24x current earnings estimates and 9x forward earnings estimates
  • Positive earnings surprise in last three quarters
  • Analysts have revised earnings estimates up for next quarter in last 30 days
  • 8.5% projected EPS growth for current quarter, 22.9% next year, 16% over the next 5 years

Actavis plc (ACT)- Healthcare

  • Trading for 12x forward earnings estimates
  • Nearly all covering analysts have revised EPS estimates up in last 30 days
  • 90% projected EPS growth for the current quarter, 55% this year, 22% over the next 5 years

Nu Skin Enterprises Inc (NUS) - Non-Cyclical Consumer

  • Trading for 23x current earnings estimates and 16x forward earnings estimates
  • Analysts revised EPS estimates up in last 30 days
  • 95% projected EPS growth for the current quarter, 67% this year, 28% over the next 5 years

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.