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Jewish World Review August 26, 2008 / 25 Menachem-Av 5768 Retail stocks may not be best fit for investors By Gail Marks Jarvis
http://www.JewishWorldReview.com | (MCT) When should you head to the clearance rack of retail stocks? Not yet, says Morgan Stanley retail analyst Gregory Melich. There are probably a series of markdowns yet to come. Hints of the future were plentiful last week. Target Corp. stock fell when the company said consumers have been reluctant to buy clothes and have struggled with credit card bills. Home Depot Inc. dropped about 4 percent when it noted that customers were fixing what's broken around the house rather than taking on major redecorating projects. And Saks Inc., with its stock down more than 50 percent for the year, said even affluent customers are cutting back. Melich warned investors in a report last week to be cautious about retail stocks overall, even though some shares have fallen so far they may look enticing. Still, if you try to hold out for the final markdown on retail stocks, you could lose. Finding deals on the stocks isn't nearly as predictable as waiting until the day after Christmas to buy a sweater. Investors who wait and see with retail stocks engage in a difficult game, said Bernstein Research analyst Uta Werner. The "swift and powerful" rally in retail stocks based simply on the pullback in oil prices during the last few of weeks demonstrates what can happen, she said. "These stocks are highly anticipatory," Werner said. "An improving consumer backdrop will be embedded in valuations well in advance of their actualization, making the case for early accumulation." Her top picks are Home Depot, Lowe's Cos., Target and J.C. Penney Co. Melich agrees that investors need to buy retail stocks before the future is clear. But he thinks it's too early. He said the effect of tax rebate checks will wear off this quarter, and "may actually have a pull-forward effect that could make conditions worse for retailers into 2009." And he adds that as consumers deal with unemployment, high gasoline prices and tighter credit conditions, the "slow-drip deceleration will continue into 2009." Of course, keeping an eye out for an easing of those conditions is critical for an investor, he said. Typically retail stocks tend to start climbing before investors realize that the economy is on its way to improving. During the last recession in 2001, for example, the stocks were starting to recover while analysts were growing gloomier on prospects for all stocks, and cutting their profit estimates. In retrospect, the signal of change was that analysts were lowering their expectations less for retailers than for stocks in other sectors. Investors who want to spot the turning point for retailers can keep their eye on financial companies, said Vince Farrell, chief investment officer of Soleil Securities Group. As financial company stocks rally, so do retailers, he said. But understanding when a retailer might see better days could be easier in this market than catching the bottom in financials. There have been numerous false starts in financial stock rallies as companies have shocked investors repeatedly with new write-downs - about $500 billion total so far. In retail, Melich thinks investors saw a false start in July as the stocks rallied sharply off their lows before pulling back again. As a result of that rally, he said the stocks are not cheap. He thinks investors are expecting the companies to provide profits that will fall far short next year. Analysts are estimating 2009 profit growth at 13 percent, about 5 percentage points too high, Melich said. When companies disappoint investors by reporting profits that are lower than expected, investors often dump the stocks and their prices fall. Werner said the key to retailers' profits in the near future will be the labor market, which is difficult to read. Still, some analysts said that even without serious layoffs, the consumer is going to be hurt more than many experts anticipate. Lenders, worried about overly indebted consumers, are cutting back access to home-equity loans, home-equity lines of credit and credit card lines of credit. Oppenheimer analyst Meredith Whitney said that consumers will have about $2 trillion less credit at their disposal by 2010. Of course, that means cutting back on purchases, perhaps a painful experience for the economy. Merrill Lynch economist David Rosenberg said that, with excessive debt, consumer spending has swelled to a record 71 percent of gross domestic product, while 65 percent was normal for the late 1980s and early 1990s. But he said a consumer spending bubble is already popping: "We are focusing less on buying more, and focusing more on either fixing up or upgrading the $4 trillion of consumer durable assets that Americans accumulated during the consumption boom of the past 20 years." Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". Sign up for the daily JWR update. It's free. Just click here. Gail Marks Jarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement without Living Like a Pauper or Winning the Lottery." Comment by clicking here.
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