By Brian Sozzi
It almost feels like two hurricanes have swept through the markets in two weeks' time, doesn't it? Last week, hurricane Growth Slowdown, a category three, tripped up those eager to buy the supposed bottom. This week, hurricane S&P made its landfall, bringing with it numerous knock on effects that are likely to take a while to clean up. Both of these hurricanes have left outright carnage in the usually fertile grounds of equities markets. In stock market jargon, best in breed is close to having a "It's on Sale" sign affixed to its front lawn, while best ones not to own are a step nearer to receiving a sign in the mail titled "Help me, Drowning."
One disaster area that is starting to unearth potential opportunities is consumer discretionary, though I caution that to fall into the category of opportunity the stock's valuation has to be ridiculously cheap. By ridiculously cheap I mean, the stock is trading at eye-popping discounts to intrinsic value and relative to peer comparables. Keep in mind that with the latest bout of market turmoil the portion on my trading screen devoted to consumer discretionary has shifted to stocks mostly being down year to date, so the market is loudly proclaiming consumer spending in 3Q and 4Q will be dour. Despite the impending decline in pump prices and lower rates on credit card balances and mortgages due to the pile in trade in Treasuries, the market is sending a different message on the health of the consumer.
Storm Chasing Basic Qualifier: Valuation
Oftentimes we hear analysts making valuation calls on a particular stock or sector, upgrades or downgrades based primarily on the "risk reward" pendulum swinging in one way or another. I think the moment is approaching to roll the dice and make a couple of valuation calls in consumer discretionary. Note this is a very risky strategy as the fundamentals of the companies being analyzed are not turning up quite yet, the more constructive stance is a function of relative and absolute valuation levels that are too cheap to overlook given the amount of cash on the books or other catalysts that are on the immediate horizon. Also, the devastation of the recent storms I think reignites takeover chatter in the retail sector, especially since access to funds is nowhere near as tight as it was in 2008.
Names to have on the radar screen when we see the bottoming process in the broad market unfolding include:
Aeropostale (ARO), Guess (GES), Ann Taylor (ANN), La-Z-Boy (LZB), and American Eagle Outfitters (AEO). Of this group, American Eagle is an interesting case. We know the back-to-school selling season will be challenging for it, but the stock yields about 4% and a new CEO is likely to be announced by year end.
Retail Stocks Higher Year to Date
BJ's Wholesale (BJ), Tiffany & Co. (TIF), Bed Bath & Beyond (BBBY), Under Armour (UA), Wolverine Worldwide (WWW), Polo Ralph Lauren (RL), Hot Topic (HOTT), Men's Warehouse (MW), Finish Line (FINL), JOS A Bank (JOSB), Abercrombie & Fitch (ANF), Limited Brands (LTD), Dollar Tree (DLTR), DSW (DSW), Ross Stores (ROST), Genesco (GCO), Wet Seal (WTSLA), TJ Maxx (TJX), Vitamin Shoppe (VSI), Steve Madden (SHOO), Dillard's (DDS), Cache (CACH), True Religion (TRLG), Fossil (FOSL), PriceSmart (PSMT), Lululemon (LULU), Crocs (CROX), Ulta Salon (ULTA).