In what seems like a flash, the first quarter of 2017 is behind us.
And the second earnings season of the year kicks off this week — the first of the Trump presidential era.
So far, there’s plenty to get excited about…
Last quarter, 65% of S&P 500 firms beat bottom-line analyst estimates, according to FactSet. They also project the biggest quarterly earnings growth for the S&P since 2011.
But not all companies will be jumping for joy this season.
And as senior analyst Jonathan Rodriguez notes below, an entire sector is bracing itself for a world of pain…
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Retail Terminator: Judgment Day
As a Wall Street Daily reader, you often hear that stock prices ultimately follow earnings.
The idea is simple: If a company’s earnings are rising, the stock will rise as it becomes more valuable.
The inverse is also true. When earnings slip, the stock is sure to follow.
Well, few sectors have slipped as much as retail over the last decade.
Of course, one look at a 10-year chart of XRT — the SPDR exchange-traded fund that tracks large-cap retailers — might tell you otherwise. In the last 10 years, the retail benchmark has gained 90%, excluding dividends — compared with a 62% rise in the S&P 500 over the same period.
There’s one problem, though…
Much of XRT’s gains were driven by online shopping behemoth Amazon. And while Amazon has soared, brick-and-mortar shops have been dying a slow death.
Since 2007, the once-mighty office supply firm Staples Inc. has lost nearly two-thirds of its market value.
And shares of two other key XRT holdings — Sears Holdings Co. and SuperValu — have dropped a stunning 90%.
Ultimately, the downfall of retail has long investors shaking in their boots. But short sellers are licking their chops.
As I pointed out last month, investors stand to bag fortunes playing the downside on certain stocks. And if you’re looking for the next “big short,” earnings season for retail is the best place to start.
Here’s a company that’s primed for a plunge…
Bull’s-Eye for the Bears
Target Inc. (TGT) is one of America’s largest big-box retailers, with more than 1,700 stores nationwide.
The company has gotten some bad press over the last few years: for its marketing mishaps, a large-scale data breach and its political leanings.
Even without the negative sentiment on the stock, Target has struggled to stave off fierce competition from Amazon — and its earnings reflect a losing battle.
In 2015, following the data breach — which affected 110 million customers and cost the company $39 million in lawsuit damage — the company swung to its first annual loss in nearly a decade.
Full-year earnings recovered in fiscal 2016 but fell year over year by 12% in 2017. And analysts expect another 16% drop on the bottom line for 2018.
In fact, analysts have already revised first-quarter earnings down by 13%.
All in all, since July 2015, Target has shed almost half its market value.
In other words, things are likely going to get worse for the Minneapolis-based retailer, sooner rather than later.
Downside speculators might consider shorting shares outright to capture a Q1 earnings miss or holding them through the year to capture a full-year bottom-line decline.
Better still, low market volatility has made put options cheap on the stock.
The January 2018 $50 puts cost about $4.75 a contract and break even at $47.75. These puts double in value with a drop in shares to $43.00 at expiration.
And if Target outperforms expectations and shares rise, losses are limited to only the amount spent on the puts — far less than the cost of shares themselves.
Either way, the downside potential in Target is far too juicy for bears to ignore.
Bottom line: More often than not, falling earnings lead to downtrends for stocks. And Target could be the next retailer to take a big plunge. This is great news for short sellers who act now.
On the hunt,
Senior Analyst, Wall Street Daily