Gas prices have recently risen to about $4 per gallon in many parts of the country. This could cause younger consumers to start scaling back on discretionary purchases like clothing. It's possible these consumers will have to allocate more of their budget towards gas in order to commute to school and their jobs, and cut back with other purchases.
With this in mind, I think there are two apparel retailers that could be poor investments going forward. Investors should think seriously about whether these stocks are overpriced, and therefore could easily drop on any disappointing news. I think it makes sense to take some profits on these shares. In particular, I am looking at the rich P/E ratios, and very heavy insider selling in these names:
Zumiez, Inc. (NASDAQ:ZUMZ) is trading around $26. Zumiez is a specialty retailer of sports related apparel that appeals to a younger consumer. These shares have risen from a 52 week low of $14.15. The 50 day moving average is $25.57 and the 200 day moving average is $22.16. One concern is that it looks like ZUMZ could soon fall through the $25.57 level which is 50 DMA. The earnings estimates for 2011 are about 87 cents per share, and $1.03 for 2012. This puts the P/E ratio at well over 30 which is far too rich in my opinion. Plus, insiders have been repeatedly selling shares. See insider selling here.
rue21, Inc. (NASDAQ:RUE) is trading around $35 per share. rue21 is a specialty retailer that markets to a younger consumer as well. These shares have risen from a 52 week low of $20.28. The 50 day moving average is $31.60 and the 200 day moving average is $29.07. The earnings estimates for 2011 are about $1.20 per share and $1.42 for 2012. This puts the P/E ratio at over 25 which is high for the apparel retailing sector. Insiders have been repeatedly selling shares. See insider selling here.
With both these retailers trading at lofty premiums, it's probable that the easy money has been made in these stocks. At these levels, the risk reward ratio does not appear very favorable for longs, which is why I think it's wise to follow the insiders and sell.
Data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.