Struggling retailers are scrambling to find new ways to get their discounted merchandise in front of consumers. With the holiday season accounting for 20-40% of annual sales, the need to get it right is critical. Last year was tough for many of these companies as weak holiday sales caused a selloff that was the beginning of a nine-month downtrend.
Many retailers have cleaned things up since then with more streamlined inventory and targeted advertising. The recently strong Q3 earnings season in this sector shows this and we’ve seen a turnaround in many retailers. Management at some companies are sounding brighter as well as Nordstrom (JWN) and Target (TGT) among others have recently raised guidance.
That said, not all of the stocks in this group are ready to be bought. Along with revised upward fundamental guidance, it’s important that your stock be technically healthy as well. You want to see a chart where the price of the stock is above resistance and where the RSI and the MACD have positive crossovers as well. As always, the more positive technical indicators that you can put together with an improving economic outlook, the better.
Below are two stocks that are currently trading above resistance and look positive. The first one is the large department store chain Kohls (KSS) which is currently extended in price as the company has already reported a solid quarter and earnings estimates for next quarter have been revised upward. In other words, “the cat is out of the bag” and the heavy buying in response to the strong quarter has put it in a position of currently being above a rational buying range. Look for a pullback to around the $46 range before purchasing.
The second stock is a discount retailer that caters to preteens– Five Below (FIVE) – and it has turned technically positive as analysts continue to revise their earnings estimates higher. That said, the company is due to report Q3 earnings on December 1st. Buying a stock ahead of its earnings release can be a gamble however the reward possibility with FIVE appears higher as the stock is only just now breaking above its 50 day moving average.
The third stock – Under Armour (UA) is a company that came in above 3rd quarter earnings estimates but missed a bit with their sales. As you can see, the stock is not technically positive and at this time, should not be bought.
The fact that retailers are beginning to report healthy earnings and sales is a plus as consumer spending is 70% of U.S. GDP and any pickup will help boost this key economic indicator. Keeping an eye on the winners vs the losers in sales this holiday season and coupling that with their charts will really improve your chances of outperforming this currently strong market.
Mary Ellen McGonagle
MEM Investment Research
www.MEMinvestmentResearch.com
Daily Chart of Kohls
Daily Chart of Five Below
Daily Chart of Under Armour
