The current credit and housing markets issues are continuing to pressure consumer confidence. The retail sector does not look good at this time, with numerous stocks trading near or below 52-week lows and sinking.
Investors had been hoping for positive December data, but with all of the turmoil and declining consumer confidence, it should not be a surprise to you that the sales data were weak. Consequently, numerous retailers have dropped their earnings guidance for the fourth quarter.
Data from Thomson Financial showed that 19 retailers failed to meet their December forecasts (based on same-store sales of stores opened at least a year), with nine beating projections and one in line.
Retailers reporting disappointing results included Limited Brands, Inc. (NYSE/LTD) and AnnTaylor Stores Corporation (NYSE/ANN). On the positive end, giant retailer Wal-Mart Stores, Inc. (NYSE/WMT) beat Street earnings estimates. Wal-Mart, struggling with growth in the United States, is betting on growth in China. It recently announced that it would expand in China at over 30% annually. Wal-Mart currently has 94 stores in China and has approval to open six more stores. The expansion process should not hit any hurdles, as Wal-Mart is a major buyer of local Chinese goods in both China and for stores outside of China. We like this strategy and believe that Wal-Mart is a decent long-term holding with dividends.
If you are currently holding retail stocks, here is what you may want to consider. Given the neutral to negative sentiment towards retail stocks, you could write some covered call options on your stocks to generate some premium, thus reducing the overall average cost of the stock in question.
Avoid retailers at this time. If you are negative on the retail sector and want to short, I would suggest you reconsider unless you have a stomach for risk. If you need to short, please place appropriate stop-buys on the short position or you could find yourself vulnerable should the stock stage a strong rally. A better alternative to shorting would be to buy Put options or initiate Bearish Put Spreads.