MorningWord 5/21/14: I’m goin where those chilly winds don’t blow

by Dan May 21, 2014 9:26 am • Commentary

In case you missed it, domestic retailers have had a tough first four months of the year due to cold, rain and snow.  And looking at the results, guidance and price action of the likes of BBY, BBBY, COH, FDO, LULU, PNRA, TJX, TGT (to name just a few) one would not think that the U.S. economy was in very good shape or that the largest equity market in the world of which they are all components could be trading anywhere all time highs. One thing that most of the charts of the stocks listed above have in common is that on a six month basis, they all start in the upper left and end up as of yesterday’s close in the bottom right.

Obviously there are a few outliers and many seem stock specific.  Last week, JWN issued a beat and raise, and the stock exploded to new all time highs, closing up 15%!  And just this morning TIF reported a huge beat with sales rising 13% year over year, the largest quarterly sales increase in two years.  Those two were clearly in the minority, and frankly I am hard pressed to come up with too many other consumer facing companies (aside from AAPL) that have beat already low expectations due to weather.

Retail stocks were bull market leaders until late 2013.  The XRT / SPY ratio topped out in the fall, and took a nose dive when the calendar turned to 2014:

XRT / SPY ratio, Courtesy of Bloomberg
XRT / SPY ratio, Courtesy of Bloomberg

The ratio hit a 1 year low this month, and is now at the same level as it was 2 years ago. Quite a turn in relative performance compared to just 6 months ago.

The consumer discretionary sector has long been an expensive sector of the market, but growth investors were happy to overlook rich valuations given the scarce earnings growth that the sector provided.  After a dismal holiday shopping season, investors finally started questioning forward growth projections for retailers as a whole, and the frigid start to 2014 did the stocks no favor to change the lowered outlook.  Yesterday’s flurry of weak retailer results has become more the norm rather than the exception, to the point that even if the SPX index can make a new high in the coming months, we don’t anticipate rotation into retailers simply because they’re oversold.

The time to be in retail has come and gone for this market cycle.  The chilly winds of winter were probably just the final push to start the selling cycle as fund managers rebalanced the sector from overweight to equal weight, or even possibly underweight.