Coverage Update: Another Warning Bell Peals

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Includes: AVP, BKS, COH, EL, GPS, JCP, KORS, LB, M, MAT, RDEN, TGT, UAA, WFM
by: Kevin Donovan

Summary

Weak December retail sales report is another caution flag.

Fed is likely to tighten later rather than sooner.

We run down our consumer and retail names.

We have struggled with the signals from oil and bonds (our worries were chronicled here), daring to think they could be portending doom. This week's report from the Commerce Department on December retail sales is another warning peal.

Retailers and restaurants, excluding gasoline stations, saw a 0.3% decline in December from November, although they were up 3.2% year over year.

In the meantime, crude is below $50 a barrel and the 10-year Treasury note yield has plummeted to under 2%. Copper is charting new lows. Yields on some government bonds in Europe, where deflation hovers like some avenging fifth horseman from the Apocalypse, have even darted into negative territory. China is slowing China and Japan is moribund.

In the U.S., inflation remains slightly positive but is nowhere near any foreseen level that would prompt the Federal Reserve to end the party soon. The Labor Department reported this morning that the consumer price index excluding food and energy was flat in December and year over year was up just 1.6%. Real GDP growth is still expected to have been an annualized 3% or better in the fourth quarter and job growth continues to be brisk, although wages remain a disappointment to us and other 99%-ers.

One aspect of the oil price collapse mitigating our concern is that the relationship between oil demand and economic output ain't what it used to be. An illuminating interview with Daniel Lacalle published here notes that it takes less oil to support economic output than it did in the recent past.

Our best advice for the stocks we cover? We're willing to hang on until earnings reports next month. Here's a rundown of our recommendations and stock price performance:

Avon Products (NYSE:AVP), Buy, down 22% since our Nov. 19 call. The strong dollar hurts, Latin America is key, but the stock is awfully cheap and dividend is juicy.

Barnes & Noble, (NYSE:BKS), Neutral, flat since our change from Buy (Sep.5, also flat) on Dec. 10). Fairly valued, we believe, ex-Nook.

Coach (NYSE:COH), Buy, up 8.5% since our July3 call. Acquisition of Stuart Weitzman should be additive.

Esteé Lauder (NYSE:EL), Buy, flat since our Dec. 5 call. Hong Kong a wild card.

Gap Stores (NYSE:GPS), Buy, down 9.1% since our Aug. 24 call. Old Navy is doing all the heavy lifting.

J.C. Penney (NYSE:JCP), down 26.3% since our Sep. 12 call. Bad timing on our entry point, but stock is way too cheap if comps stay positive.

Michael Kors (NYSE:KORS), Neutral, down 14.9% since our 15% since our Nov. 3 call. Luxury for the masses. Discounting will hurt.

L Brands (NYSE:LB), Buy, up 23.4% since our Sep. 20 call. Fast-moving marketer of glamour and the boudoir. Expanding into China.

Macy's (NYSE:M), Buy, up 3.4% since our Sep. 1 call. Restructuring and embrace of digital could be a successful hybrid.

Mattell, (NASDAQ:MAT), Buy, down 12% since our Oct. 6 call. Did "Frozen" come to the rescue this Christmas? Management's new idea incubation team could make a difference down the road.

Elizabeth Arden (NASDAQ:RDEN), Buy, up 21% since our Aug, 20 call. The Rhône Capital stake keeps us confident in a fragrance turnaround.

Target (NYSE:TGT), Neutral, up 2.5% since our Nov. 20 call, Buy from Sep. 30 to Nov. 20, up 14.3%. Too expensive given margins and competition, in our view. Admission of failure in Canada helpful but hardly praiseworthy.

Under Armour (NYSE:UA), Neutral, up 2.2% since our Oct. 24 call. Still think all the easy money has been made.

Whole Foods Markets (NASDAQ:WFM), Neutral, up 34% since our July 8 call. We whiffed on this one. Thought stock was too pricey for growth outlook.

Meanwhile, dear reader, we're still in our theater seats through earnings season, but the show is getting scarier.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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