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Thursday, August 03, 2006

CrossProfit in Market Overview

Guest author CrossProfit: Some Retail Stocks are a Tough Call - Starbucks (SBUX)
Obviously there will be some winners and some losers. More importantly is the general perception of the street for the sector as a whole.

At present the markets are apparently in a valuation correction mode. Not that PE's are so terribly high - it's more like that future earnings are a major concern. Taking this into account the market is reacting to a possible earnings downgrade to some retail stocks in particular.
For several months now, CrossProfit has been warning about Starbucks (SBUX) being overvalued. The first warning was issued in 02/07 (see News Bulletin Archives - green column). In the beginning of July when SBUX hit $36 we posted a yellow warning that there was still another 15% downside to come. It came sooner than we expected!

There are two factors at play. First and foremost, a general uncertainty regarding the well publicized U.S. economic slowdown. Bernanke recently reiterated this generally accepted phenomenon and labeled it a 'consumer slowdown'. Hence, retail stocks are taking a hit.
The second factor is consumer trends. Retail is notorious for changing direction over night. Not long ago several major league players got it wrong and paid dearly for their miscalculations. In the U.K., (apparel retailer) M&S was in the doldrums for years and just couldn't seem to get back on track. Now M&S is in fashion again.

The market has a tendency to overshoot in both directions. The U.S. slowdown will not be as severe as the market reaction renders which will result in investment opportunities. As for retail in general; markets have been pretty good in predicting imminent trend changes.

Retail stocks in your portfolio that are trading in accordance with the 'earnings factor' will bounce back in the near future. Q2 earnings coming out indicate that earnings growth has not fallen below 7%. The bears are now heading back into hibernation and will most likely try again just prior to Q3 earnings season. Undoubtedly they will be thrown back into an extended winter slumber.

As for retail stocks that are trading down due to genuine fundamental concerns - well you know what to do...don't bear it - sell it.

Disclosure: This is the consensus of the CrossProfit analyst/research teams.

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