Retail Sector: Is It Time to Play Calls on the RTH?
By Ann Sosnowski
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Do not give in to the false buy signal on the retail index.
Both specialty retail and department store retail stocks look like poor investments.
However, one tech retailer and one discount warehouse retailer look like good call option buying opportunities.
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The RTH is the Retail Service HOLDRs ETF, an index that follows 18 top retail companies including Federated Department Stores (FD:NYSE) (which plans to change its name to Macy’s Corp.), Wal-Mart Stores Inc. (WMT:NYSE), and Target Corp. (TGT:NYSE) as well as some online retailers like Amazon.com Inc. (AMZN:NASDAQ).
As has been the custom over the past few years, the RTH rises in a sharp incline going into the Christmas season, as speculators anticipate increased earnings and sales from department stores and specialty retailers alike.
This sharp incline is then followed by a flat trading range in cyclical fashion, followed by a minor pop due to fourth-quarter earnings reports and future guidance for the new fiscal year.
RTH then runs flat and it’s up to select companies to make the headlines themselves by funding increased investor interest through merger or acquisition activity, share buybacks, store closings, cost cutting or expansion into other countries.
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I do want to take this time to caution you about the retail industry as a whole: Although retail numbers have been fairly good this week, the RTH is putting on a false signal and should be ignored. If you’re going to do anything right now, it should be to watch it closely and just study its movements.
The RTH is just coming back from a historical high price hit at $106.72 on February 20. Following that hit, a doji formation surfaced, which indicated to any chart reader that puts were in order as the tide was changing for the retail index.
Current trading looks temporarily strong: Price is flat above $100 per share and coming off of the floor on RSI.
However, Money Flow is flat, and prone to a larger drop, not to mention that a 50-day over 10-day Moving Average crossover is in the works, which will give the RTH temporary refuge at its 200-day Moving Average, but most likely drop it down to almost $95 per share by the end of summer 2007.
Retail Sector: Specialty Retail or Department Stores?
There’s all this talk these days about how well department stores are doing compared to specialty retail stores.
It’s the Wal-Marts and the Federated Department Stores against the Gaps and Ann Taylors of the world.
Regardless what side you pick on this argument, your returns are going to be dull at best.
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Wal-Mart Stores Inc. (WMT:NYSE), with all its noise about expanding into China, hasn’t broken above its flat cyclical high of $55 per share. Federated Department Stores (FD:NYSE) is failing at a Double-Top formation at $45 per share which will take it back to $40 per share in the next few months… and maybe even lower.
Of course Gap and Ann Taylor are certified losers. Gap Inc. (GPS:NYSE) is selling its Forth and Towne stores, which existed for a modest 18 months and focused on professional women over 30. Even its Old Navy store franchises are posting low sales. GPS could return to $15 per share in the short term. And Ann Taylor Stores Corp. (ANN:NYSE) is still falling after its major sell off during the holiday months of 2006, losing all support and most likely finding its way back to $25 per share.
Neither department stores nor specialty retailers look especially enticing. Saks Inc. (SKS:NYSE) reported a surge in sales of 17% during the fourth quarter today, pushing the stock up to an exorbitant high of $21.12. That doesn’t mean it’s a good stock to buy right now. Generally, these kinds of stocks run flat, privy to only minor pops on earnings reports during the fiscal year… and anyway, the stock has been in a steady declining trend since August 24, the high today of which hit the top of that falling channel.
Of course, you could point to another specialty retailer as an example of a red herring investment: although Payless Shoe Source (PSS:NYSE) announced a profit of 37 cents per share, the company’s stock is way overvalued at this point.
And today’s gap in price to an open of $33.72 from yesterday’s close of $31.43 per share will have to be filled in. I’ll believe it’s on a bull run when I see PSS beat current resistance is at $35.50 per share.
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Retail Sector: Any Hidden Gems?
Stock choices in the retail industry are pretty bleak these days. A quick scan of all the companies on the RTH show flat to falling future prices. Home Depot Inc. (HD:NYSE) looks bleak, while Lowes Companies (LOW:NYSE) looks good for the short term if you’re an options trader.
Additionally, grocery companies like Kroger Co. (KR:NYSE) and Safeway Inc. (SWY:NYSE) are stocks to stay away from, as well as drug store companies like Walgreen Co. (WAG:NYSE) and CVS Corp. (CVS:NYSE).
I do have a couple of favorites though…
Best Buy Inc. (BBY:NYSE) has found regular support at its 23.6% Fibonacci retracement. The company is also pulling out of both oversold RSI and Money Flow, an indication that buying is correlated well. Although it’s heavily priced, in my opinion, as a stock purchase, some long-term calls mightn’t be a bad idea.
The other retail stock I really like, oddly enough, is Costco Wholesale Corp. (COST:NASDAQ).
COST is, again, too expensive for my blood to invest in over the long-term, but it also has good call option potential. The stock has an especially savvy way of attracting investors for long periods of time after finding support at its 200-day Moving Average.
The same price formation COST is trading in now is the same that the company followed in late 2005. COST moved 27% from its 200-day Moving Average to its high in only six months.
From its most recent cross over the 200-day Moving Average, this could mean a value of $67.31 by the end of August 2007 from COST’s current price.
Ann
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Related Resources
Retail Industry News: Keep up to date on all the issues that affect retailers and their operations.
Retail Industry News: Updated industry news, statistics and surveys from The National Federation of Retailers.
Retail Industry: Learn more about the Retail HOLDRs ETF (via the American Stock Exchange