How to Profit From Sears' Demise
Before yesterday's trading session, Sears (NASDAQ: SHLD) announced very disappointing news to its investors. Sears issued poor fourth quarter revenue and EPS guidance, well below analysts' estimates. Sears also stated that it will be closing about 120 stores across the US. Sears' stock nearly fell off a cliff, losing over 25% in market value. Despite being negative for current investors, can Sears' situation be positive for those looking to trade the news?
Sears not only hurt itself, but it hurt the consumer retail sector in the last two trading sessions. Based on the S&P Retail SPDR ETF (NYSE: XRT), the entire sector trended downwards after Sears' poor performance. Because of Sears' blunders, companies like Saks (NYSE: SKS), Overstock.com (NASDAQ: OSTK), and JC Penney (NYSE: JCP) traded lower. Do these companies offer any avenues for investors interested in playing the consumer retail craze?
Saks (NYSE: SKS) is a fashion retailer that sells clothes, shoes, jewelry and other cosmetic items. While Saks specifically caters to luxury retail, it operates in the same sector. Not surprisingly, Saks declined nearly 4% after Sears announced its quarterly results. Saks itself did not release any news nor did any rumors start circulating regarding Saks.
Saks fundamentally runs a tight ship. It has been able to improve earnings and EPS releases over the last few quarters. It has also appreciated over 8% in the last month. On the other hand, Zacks Investment Research downgraded Zaks in late December, citing uncertain macroeconomic factors.
JC Penney (NYSE: JCP) is a consumer retail company that caters to a wide range of clients. It sells items like clothing, hardware, jewelry, and home furnishings. JC Penney suffered a similar fate as Sears, but not to the same extent. On Sears' announcement, JC Penney moved downward by 2%. Like Saks, JC Penney did not release announcements of its own.
JC Penney may or may not be a good investment for value investors, however. Perhaps due to the 2008 credit crisis, JC Penney's revenues have steadily declined. Revenues bottomed out in 2010 and mildly increased in 2011. On the flip side, costs have steadily increased over the years, decreasing margins significantly. As with revenues, costs peaked in 2010 and came down in 2011. Investors may believe, however, that JC Penney will turn around in 2011 and beyond.
Overstock.com (NASDAQ: OSTK) is one of the few stocks that did not immediately move down with Sears in yesterday's trading session. In fact, it moved higher for the day. Today, though, it retraced its positive movements and came back down. Overstock operates like JC Penney and Sears, but is a website. With very limited overhead, Overstock does not have to worry about foot traffic in particular locations. It also has wider outreach compared to brick and mortar stores, catering to anyone in the US with an internet connection and a mailing address.
Overstock.com offers investors a strategic advantage over companies like Sears, Saks, and JC Penney due to its online business model. The one thing that investors have to consider, however, is that competitors like eBay (NASDAQ: EBAY) and Amazon (NASDAQ: AMZN) are more popular. These companies may also be viewed as more trustworthy, simply due to their brand name.
The Bottom Line:
Sears' disappointing announcement may present interesting opportunities to investors. They have to consider Sears's effects on the rest of the consumer retail sector and how the masses may have overreacted for certain competitors of Sears. Analyzing competitors' fundamentals and even tracking the sector as a whole may be useful for investors when it comes to making important decisions based off the news.
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Traders who believe that Sears will recover in the future might want to consider the following trades:
- Long Sears by purchasing shares or call options. If you go with the options strategy, you could purchase a straddle just to reduce risk associated with the bet.
- Long the S&P Retail SPDR, which will most likely rally if hurt companies like Sears strengthen over time.
- Long companies with operational advantages such as Overstock.com or Amazon, which may also benefit if the rest of the sector outperforms.
Traders who believe that Sears will continue to decline may consider the following positions:
- Short equity markets via ETFs or futures as major earnings releases approach. Major companies like Sears and Macy's (NYSE: M) are capable of moving overall markets downward.
- Short the Retail SPDR over the long-term. You could also short specific companies and long the Retail SPDR as a hedge.
- Long a competitor like eBay or Overstock.com, which may prevail regardless of Sears' decline.
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