In the case of November’s huge stock market rally, a rising tide lifted all boats. But some gains look shakier than others.
That feels particularly true of retail stocks. The SPDR S&P Retail exchange-traded fund jumped more than 8% over the past one-month period, roughly double the
S&P 500’s
rise; the
Consumer Discretionary Select Sector SPDR
Fund climbed nearly 8%.
Those big moves come amid contrasting messages about the consumer: Americans’ ongoing spending has helped keep the economy on track for a soft landing, but there’s no shortage of signals that people’s wallets are being pinched, from the rise in credit card debt to loan delinquencies.
In actuality, “neither extreme is likely correct,” writes BMO Capital Markets analyst Simeon Siegel in a new note Tuesday. That creates an opportunity for investors.
The recent upswing in retail stocks was likely a function of how much pain the sector (and the market) felt in October. But the knee-jerk move higher doesn’t reflect the nuances of the actual state of the sector.
To wit, he notes that sales grew year over year at Coach during the most recent quarter, but shrank at rivalMichael Kors; they were higher at
Lululemon
and lower at Gap’s Athleta brand;
Walmart
‘s sales moved higher, while Target’s fell.
“It seems hard to pin the problems on a top-down macro customer subset if direct competitors are seeing directly opposite results,” he writes. “Instead, winners are winning, losers are losing.”
To separate the former from the latter, Siegel ranked the retailers in his coverage first by fundamental changes—including revenue, gross margin, earnings before interest and taxes (EBIT) dollars, net debt, and consensus estimates—and then by share price performance since September.
By that criteria, TJ Maxx operator TJX Cos.; fitness country club operator
Life Time Group Holdings
; grill maker
Traeger
; and Coach parent
Tapestry
have “potential share price upside relative to their fundamental performance,” he notes.
By contrast,
Under Armour,
Ulta Beauty,
Victoria’s Secret,
and Ralph Lauren appear to have weaker fundamentals versus their stocks’ strength. That could lead to a bit of a pullback after their recent run.
That echoes what Siegel told Barron’s last month, when he argued that it wasn’t all doom and gloom for retail, despite ongoing concerns about consumer health.
Still, one single month isn’t enough to base an investment case on. For example, despite the potential for downside to Victoria’s Secret, Siegel has a Buy rating on the company. And he has a Hold rating on Life Time Group from the “upside” list. But he says the analysis can ground investors amid the ongoing debate about the health of the consumer.
“We believe it offers a helpful perspective on aligning fundamental and sentiment mismatches, particularly in periods when storytelling grows louder than results,” he concludes.
Given how competing narratives about the strength of spending and consumers’ vulnerabilities have dominated so much of the conversation of late, it’s likely something that will remain relevant for retail stocks going into 2024.
Write to Teresa Rivas at teresa.rivas@barrons.com
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