Oil prices continue to rise rapidly due to the growing turmoil in the Middle East, the excess of liquidity from QE2, and rising demand in India and China. This market is looking more and more like early 2008 when the run up in oil prices was one of the factors that tipped the economy into a deep recession. Energy inflation is already impacting consumer sentiment and it is my belief it will have major impacts to consumer spending and the overall economy. One of the market sectors that is likely to be hit especially hard is consumer discretionary stocks. Looking back at the impacts from the run up in oil prices during the first half of 2008, here are four stocks that I think are especially vulnerable and could lose at least 25% of their value in the next six months:
Lululemon – (LULU
) sells at approximately 9 times sales and close to 45 times projected earnings for 2011. It sells highly discretionary high priced athletic gear, primarily Yoga wear. Given gas approaching $4/gallon again for the first time since 2008, I believe this stock is very susceptible to a significant pullback. During the run up in gas prices during the first seven months of 2008, this stock lost over 50%.
Abercrombie & Fitch
) is a teen retailer that is selling at 24 times this year’s projected earnings and has rallied over 150% from its 52 week low. Another retailer that is likely to be hit hard by rising gas prices. In the first half of 2008, it dropped 28% as energy prices spiked. In addition, insiders have sold over 1/3 of their shares over the last six months.
BJ’s Restaurants – (BJRI
) is a restaurant holding company with 103 restaurants that sells at 40 times earnings. It is vulnerable to rising energy and food prices and the market is valuing each restaurant at over 10mm. During first half of 2008 when gas prices were last spiking, it lost over 30%. Insiders are also heavy sellers of the stock over the last six months.
Sotheby’s – (BID
) is selling at over 18 times this year’s projected earnings. Insiders have sold a third of their shares in the last six months. It has a price to sales ratio of around 4.5. It lost over 28% in the first half of 2008. Although it will probably be more impacted by the end of liquidity provided by the end of QE2 and a slowdown in the world economy, it seems ripe for a significant pullback given it has doubled since the announcement of QE2.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.