Retail in Focus

2/21/16

It’s a big of earnings ahead, with a lot of retailers weighing in on the strength of the consumer. We already heard from VF Corp and then Nordstrom, last week, which was beyond disastrous. However, this week should present some nice opportunities.

TUESDAY (M, HD)

MACY’S

Macy’s (M) reports earnings prior the market open and this will be an interesting one. Since hitting an all-time high last July, the stock is down 45%, and rightfully so. Management has not executed well, forcing the company to close stores across the nation and heavily discount excess inventory. Additionally, Macy’s flagship store in New York relies heavily on international shoppers, which means they needs a weaker US Dollar, which they haven’t gotten yet, and may not have consistently for a little while. At the same time, listening to what VF Corp said, who does significant business with Macy’s, it’s not looking good.

Analysts are looking for $1.88/share in earnings on $8.83B in revenues, which would be down 23% YoY. I believe Macy’s can miss those numbers and still rally because it will all be on the guidance. Management has to convince analysts and investors that the worst is behind it and that a turnaround is eminent. I actually do believe that the dollar is getting weaker and YoY comps are going to be easier to beat, which should aide Macy’s in its guidance. But what I don’t believe is that the company is executing well. Every time I walk into a Macy’s, it is impossible to find a sales person, when you do find someone, they typically are not friendly, and frankly, and the stores are usually empty. I am not a fan of Macy’s going into earnings and even if they report a strong quarter, I still believe there are better options in retail.

One thing I will say is the daily chart actually looks positive. There is an almost perfect inverted head-and-shoulders formation since their last earnings report, with the head at $34 (the 52-week low) and the two shoulders almost both exactly at $37.50. If you feel risky, you can buy Macy’s ahead of earnings and use $37.50 as your stop loss only if you can trade in the pre-market. If Macy’s impresses, it will likely open around $46, creating an island reversal, one of the most bullish technical formations. The market is pricing in a 9% move, so if you are looking for a speculative trade, there it is.

HOME DEPOT

Home Depot (HD) also reports prior the open and this is one of my favorite plays on retail and housing. The stock was one of the best Dow performers in 2015, but has suffered for that in 2016, falling more than 20% off the highs, however it has since recovered about half of those losses. Analysts and investors expect a lot of this company so there’s a lot of risking owning it into earnings, but I think HD will deliver. I believe housing and home improvements are still the strength of the US economy and the best place to go when you are looking to the home is Home Depot. Additionally, Home Depot has a continuously improving e-commerce omni-channel business, which further drives in-store business.

There is plenty of downside risk with Home Depot. It sports a loft 23x valuation, was a market leader for many years and is still considered a retail stock. If the US consumer really is struggling, Home Depot will be in trouble. I don’t see that being the case. I think your risk is $114, the 50% retracement and even if it gets there, you should buy it and put it away for the long haul.

WEDNESDAY (TJX)

One of the best and most consistent retailers in the last 7 years is TJX Companies (TJX). TJX owns and operates TJ Maxx, Marshalls and Home Goods, and has done everything right for years. At the same time, they are major benefactors of higher-end retail running into excessive inventory and cost cutting problems. The company’s Home Goods business has led the way over the last couple years along with the housing recovery and there is no sign of that ending.

Analysts expect the company to grow YoY earnings by about 1.1% with full year earnings growth of 4.4%. For the year, management expects same-store sales growth of about 5%, much better than competitors like Kohls, Macy’s and JCPenny. TJX has a strong US presence, so the strong US Dollar will not hurt them as much as their international competitors. A good read through to TJX was that the lone bright spot for Nordstrom last quarter was their Rack stores. Outlet and low price stores continue to prosper in this economy, and that’s TJX’s sweet spot.

TJX is one of the few stocks that is actually trading higher this year, and although it has a lofty valuation compared to other retailers, you should pay up for this consistent out-producer. There are a couple key technical levels to watch. On Friday, TJX traded down to $70.38, which is the50% retracement and 100-day moving average, but turned and rallied from there. On the downside, you have a maximum risk of 6.8%, down to $66.71, the 23.6% retracement and a level the stock has held three times since closing above it last November. I expect TJX to do what they always do, and I could see the stock rallying to new all-time highs above $77.

Retail is the name of the game this week, but there are plenty of other earnings stories, including Cracker Barrel (buy), Salesforce (buy), JCPenny (sell), Palo Alto Networks (buy) and Allergan (buy).

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies (TJX), Altria (MO), Constellation Brands (STZ), Bristol Meyers Squibb (BMY), and LONG March 10-Year Treasury futures.

Jeff Lewison

Utilities. Utilities. Utilities.

On Friday, the market received some relatively positive jobs data, which turned out to be bad news for stock bulls, as it left investors wondering if the Fed really will raise rates 4 times this year. And if this past week proved anything, the market could care less if you report a great quarter and remain optimistic about the future. Take Google and Facebook, for instance. Both report flawless quarters and since hitting all-time highs on Tuesday, both are down 12% and 13%, respectively. Under Armour knocked the cover off the ball and since hitting a high of $86.29, just one week ago, the stock has since sold off 10%.

There are a number of factors working against stocks right now. High multiple stocks are getting taken out to the woodshed if there is any sign of a problem (see Amazon, Netflix, and LinkedIn). If you own any high multiple stocks, well…buyer beware. The second issue is that the market leaders that have been almost impervious to any market negativity, are being crushed by profit-taking and panic selling (see Facebook, Google, Nike, Home Depot and Starbucks). Retailers like Ralph Lauren, Kohls and L Brands all reported disappointing outlooks, which sent a signal that the US consumer really may not be that strong. Big Cap biotech names like Gilead, Celgene and Amgen, while reporting strong growth and remain very cheap, are being sold hand-over-fist due to worries about drug prices. The badly hit semiconductor sector got relief in the last couple weeks as Skyworks Solutions and NXP Semiconductors both blew away the numbers and issued strong guidance, but nevertheless, those post-earnings gains were completely wiped out. Energy stocks? Forget about it. How about airlines, which are reporting record profits on a quarterly basis in the face of low oil prices? Delta, Southwest, JetBlue, American and United are all sitting at or near the lows for the year.

The only things going higher right now are gold, silver, US treasuries and utilities. A few weeks ago, I recommended buying some of those utilities like Consolidated Edison (ED), NextEra Enery (NEE) and Southern Co. (SO). All three of these names are up on the year, with ConEd up 13%, they all have forward P/Es of less than 18, and pay a dividend of at least 2.70%. Other names like Verizon Communications (VZ), AT&T (T) are also working in this market, trading at or near 52-week highs. Both yield a dividend of around 5% and trade at less than 13x forward earnings. Tobacco stocks like Phillip Morris (PM) and Altria (MO) are also up YTD and pay big dividends. If you bought any of those names on my recommendation, I say stick with them. If you are not in any of those names yet, I would wait until they pull back a little before buying. All are at or near multi-year highs, but I think that trend continues throughout the year, as investor money floods out of high growth and into high yield.

I also recommend buying treasuries for diversification through the TLT. I am a believer that rates will continue lower this year, which means treasury prices will rise. The TLT is up about 2% this year, and there’s plenty of room to the upside. This past week, I bought March 10-year treasury futures, in anticipation of a further drop in interest rates. The key level that I am watching in the TLT is $133, which has been resistance twice in the last 5 years. If the treasury market breaks through that level, then it should challenge all-time highs of $138.50, a 7.5% gain from Friday’s close.

Here ‘s a look at a few key earnings reports that I am watching this week:

TUESDAY (CVS, DIS)

CVS reports quarterly earnings on Tuesday morning and analysts expect Q4 profits to grow 26% to $1.53/share on $41.12B in revenues, implying about an 11% growth rate. At the same time, the average estimate for full year earnings and revenue growth is 16% and 10%, respectively. If CVS can deliver, there can’t be a whole lot more to ask for from a company trading at just 16x forward earnings and paying a dividend. Healthcare costs are only going up, with premiums on the rise, which benefits companies like CVS and Walgreens. This is a company that has consistently delivered, and I think they do the same this year. While I recommend buying CVS, I would wait until after earnings. Despite beating estimates the last three quarters, the stock dropped each time it posted earnings. If the same happens on Tuesday, I would look to be a buyer around $90.

Walt Disney will report earnings after the close and this will be a big one. The stock has gotten crushed since November and is down about 11% already YTD. Nobody cares about Star Wars anymore. Investors are acting as if ESPN is going off the air, and now, most recently, an analyst report surfaced saying that Disney theme parks were struggling across the globe. While I like Disney long-term, mainly for the same reasons that people hate Disney (theme parks, EPSN, Star Wars, Frozen, etc…), I can’t recommend buying the stock before they report. It closed on Friday about 3% from 52-week lows, and any slight issue in their Tuesday afternoon report, and the stock is going to get hammered. Although it’s trading at just 16x, investors still see Disney as an expensive stock with declining growth. If you get a sell-off in the name, wait until it recaptures $90 to build a position.

WEDNESDAY (CSCO, TSLA, TWTR)

I’ll be real brief with all four of these names: 1) Cisco (CSCO) is cheap, pays a 3.50% dividend, and has a great balance sheet, but I would not be a buyer. It’s a technology company and right now that’s almost as hated as energy. 2) Tesla (TSLA) and Twitter (TWTR) are toxic assets. I have been adamant that Twitter is arguably the worst run company in America, and I maintain that view. Management has no clue how win users, monetize their platform and grow the business. Twitter is probably a $10 stock. As for Tesla, it’s trading at its lowest level in 2 years, falling through key technical support last week. It’s incredibly expensive (on par with Netflix and Amazon and look what happened to those stocks), has lost its luster (nobody talks about Tesla anymore) and frankly, doesn’t have a true identity. Is it a tech company or automotive company? Nobody knows, nobody cares. Don’t be a buyer.

Stick with names that are working in this environment: High yielding, low multiple utility stocks. Add some US treasuries for diversification and continue to sell positions you don’t LOVE on market rallies.

My current positions: Long Gilead Sciences (GILD), Starbucks (SBUX), Time Warner (TWX), NXP Semiconductors (NXPI), Darden Restaurants (DRI), Celgene (CELG), Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), Apple (AAPL), Southwest Airlines (LUV), Dow Chemical (DOW), Costco (COST), Amgen (AMGN), Home Depot (HD), Allergan (AGN), FireEye (FEYE), Humana (HUM), Skyworks Solutions (SWKS), Disney (DIS), Lockheed Martin (LMT), TJX Companies, Altria (MO), Constellation Brands (STZ), Bristol Meyers Squibb (BMY), and LONG March 10-Year Treasury futures.

Jeff Lewison