Sunday, November 11, 2007

Are Retail Stocks Overvalued Or On Sale?

For the past week or so I have intended to post a comment on the retail sector. It looks like Barrons and The Big Picture websites beat me to the punch. I will not restate Barrons or The Big Picture articles. To get a glimpse into the sector, one can read the The Big Picture's article, Are Retailing Stocks Bargains? TBP also provides a link to the article that appears in this week's Barrons

Earlier this week I was conveying a retail story to an associate on the fact my wife received a $25 gift card in the mail from J. Crew (JCG) several weeks earlier. About a week later, the J. Crew store in a mall near us called my wife to remind her of the gift card and that the store would be getting a fresh supply of merchandise the following Monday. Now, if retail business was that good, I do not think the store would be calling potential customers. I actually can't recall this ever happening before. As I finished this story my associate told me he received a similar call from a Jos. A Bank (JOSB) store near where he works. The caller from the store advised him of a sale and new merchandise. Not to be out done, J. Jill, owned by Talbots (TLB), also called my wife to tell her of a sale their store had in progress. Other than the fact my wife is likely doing too much shopping in these store, retail can't be all that good if individual stores are calling potential customers in order to generate sales.

(click on chart for larger image)

stock charts Jos Banks, Talbots, J. Crew November 11, 2007
Based on the below retail sector chart from Bespoke Investment Group, the sector is trading below its long term average sector weighting. Additionally, markets tend to improve six months following a Fed rate cut. It is likely then that certain retail stocks look like somewhat attractive investments at this point.

consumer discretionary sector weighting November 11, 2007

Six months ago , when many retail stocks were trading at 52-week highs, not many analyst were calling for a decline in the retail sector. Now that many of these stocks are down, analyst turn negative on the stocks. From a contrarian perspective, maybe this is a sign of a bottom in the making.

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