Retail Slowdown Not a Myth

December 17, 2007

There has been continued talk of a slowdown in consumer spending due to the spiraling housing prices and its effect on an overall US economic slowdown. Whether it means going to the mall or through online purchases, consumers will not be spending as much in 2008. If existing house prices are poised to drop 4.5% next year, then the average household net worth will be decreasing around $11,000-$32,000 depending on where you live in the US. With that kind of decrease (and it could be worse), people will be forced to cut their spending and the retail sector will be the first casualty.

When I was shopping at Horton Plaza yesterday in downtown San Diego, I went to buy something cheap at Longs Drugs to get my parking validated for three hours of free parking. After getting to the register, I was told that businesses no longer validate parking anymore since there are now kiosks in the mall that will allow anybody to validate parking for free. Therefore, shoppers do not have to spend a cent to get three free hours of parking. Upon further investigation, I found out that Horton Plaza was doing this in order to allow people to “window shop” without any ramifications of having to pay exorbitant parking prices. While I was pleasantly surprised to get three free hours of parking, I also realized:

a) consumer spending must really be slowing to a halt for this five-level shopping mall to give away parking to attract customers

b) the housing bubble seems to be affecting traffic at the local malls

c) coupled with higher gas prices, people are either deciding to shop more online or just stay home and not spend in general

The market has surely priced a lot of bad news into retail stocks within the last year. Many of them stand at yearly lows or far from their earlier peaks. I would wait for the holiday season to pass and get a clearer picture on the health of the retail sector and buy once prices to depress another 10%.
Some beaten down retailers include:

Company Current Price Yearly High
American Eagle (AEO) 20.27 34.80
Limited Brands (LTD) 18.69 31.30
Pacific Sunwear (PSUN) 14.44 23.11
Lowe’s Companies (LOW) 22.72 35.74
JC Penney (JCP) 42.52 87.18
Home Depot (HD) 26.63 42.01
Dillard’s (DDS) 19.53 40.56

Application of Stock Picking Basics (2)

November 2, 2007

It is very easy to get carried away and buy stocks when the market is up to ride the positive upward momentum. But it is much more difficult to invest in declining markets. Declining markets provide opportunities to buy stocks that are oversold or undervalued. Investors need to realize the following points when investing in declining markets:

a) Make sure you have the cash available to invest in new options. This is why it is always a good idea to keep a share of your stock portfolio liquid on the sideline for major drops in stock prices.

b) Selling a stock at a loss may be necessary to get into another investment opportunity with more potential. If you think the stock you currently own can only go back up 20%, but another company has the potential for 30% gain, write down the loss for the year and make a better investment choice.

c) Keep your head up and don’t get discouraged by all the negative news because people will panic and it’s your job to find stocks that don’t deserve to be at their current valuations. Think of down markets as discounts the market is offering you.

d) Don’t just buy whatever has dropped the most, but still concentrate on what businesses have the best future growth prospects. Remember, some sectors are not very attractive markets to buy whether you’re in a bull or bear market. Right now, I feel that way about home builders and mortgage companies. Maybe a company like Home Depot (HD) would be a safer bet if you want a company that has some direct correlation with the housing market.

e) Mentioned in the Application of Stock Picking Basics (1), make sure you only invest in companies that you understand. If you don’t understand how the company makes money and will be able to increase profits domestically and globally, it doesn’t matter how much they are down.

The NYSE was down 2.6% (more than 360 points) and will probably feel some negative effects tomorrow with much uncertainty in the market. Stocks from all sectors got pummeled, and some stocks of note to take a look at that were down at least 4% are:

  1. Las Vegas Sands (LVS): -5.6% in regular session and -15.1% after hours to 106.402
  2. Peabody Energy (BTU): -11.3% to 49.47
  3. Wynn Resorts (WYNN): -4.0% in regular session and -8.3% after hours to 142.084
  4. Aluminum Corp of China (ACH): -7.1% to 68.02
  5. KB Homes (KBH): -6.4% to 25.88
  6. Merrill Lynch (MER): -5.8% to 62.19
  7. Flotek Industries (FTK): -28.3% to 36.45
  8. Aéropostale (ARO): -7.2% to 21.26
  9. Nucor Corporation (NUE): -6.6% to 57.91

There are so many stocks down over 4% today that it’s hard to pick and choose the “best” ones, but there are a lot of opportunities for investors who have the right mind set while others start to panic. Invest wisely!!