Few retail stocks rated "buy".
As of Wednesday, the last trading day before Black Friday, only a relative handful of retail stocks in VectorVest's universe were assigned "buy" ratings. For example, among the 28 retail stocks in VectorVest's miscellaneous/diversified retail industry group, only 4 were rated buys, with VST rankings ranging from 1.07 to 1.27 (on a scale from 0 to 2). Recall that VST (Value, Safety, Timing), VectorVest's master ranking, is comprised of a weighted average of its Relative Value, Relative Safety and Relative Timing indicators, with Relative Value underweighted and Relative Timing overweighted.
Hedging 7 buy-rated retail stocks
The table below shows the VST rankings for 2 of the buy-rated retail stocks in the miscellaneous/diversified industry group (the 2 others had no options traded on them, so they weren't included), plus the VST rankings for 5 other buy-rated retail stocks, across 3 other retail industry groups. It also shows the costs, as of Wednesday's close, of hedging all 7 stocks against greater-than-26% declines over the next several months. First, a reminder about what optimal puts are, and a note about why I've used 26% as a decline threshold; then, a screen capture showing the current optimal puts to hedge one of the buy-rated retail stocks listed below, Wal-Mart Stores, Inc. (WMT), against that threshold.
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
In this context, "threshold" is the maximum decline you are willing to risk. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). Usually, I use 20% decline threshold when hedging equities, but Conn's Inc. (CONN) was too expensive to hedge using a 20% threshold (i.e., the cost of hedging it against a 20% decline was itself more than 20% of position value, so Portfolio Armor indicated there were no optimal contracts available for it). The smallest decline threshold against which it was possible to hedge CONN was 26%, so that's the decline threshold I've used for all of the names in the table below.
The Optimal Puts For WMT
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of WMT against a greater-than-26% drop between now and June 15th, 2012. A note about these optimal put options and their cost: to be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice, an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.
VST Rankings And Hedging Costs As Of Wednesday's Close
Within each industry group, the retail stocks below are listed in descending order of their VST (Value, Safety, Timing) rankings as of Wednesday's close. The hedging data is as of Wednesday's close as well, and is presented as a percentage of position value.
|VST Ranking|| |
|(GNC)||GNC Holdings, Inc.||1.09||16.7%***|
|Sally Beauty Holdings||1.07||17.7%***|
|(WMT)||Wal-Mart Stores, Inc.||1.20||1.69%***|
|(ROST)||Ross Stores, Inc.||1.29||3.16%**|
|(NYSE:TJX)||TJX Companies, Inc.||1.27||2.04%*|
*Based on optimal puts expiring in April 2012.
**Based on optimal puts expiring in May 2012.
***Based on optimal puts expiring in June 2012.