RealMoney Silver - Retail Stocks Perk Up

Retail Stocks Perk Up
By Pia Sarkar
Staff Reporter
1/22/2008 3:25 PM EST

SAN FRANCISCO -- Battered retail stocks got a rare lift Tuesday as the Federal Reserve's emergency interest rate cut helped ease some worries about consumer spending.

The S&P 500 recently was down 16.5 points, or 1.3%, to 1309. But the S&P Retail Index was up close to 15 points, or 4%, to 389, marking a turnaround from a recent sector selloff spurred by soft holiday sales, weak profit outlooks and fears of an ongoing consumer slowdown.

Marie Driscoll, a retail analyst for Standard & Poor's, says retail stocks may have been oversold as investors began to panic about a possible recession. She notes that even the typically strong players were taking an unnecessary hit.

"Shopping is still a national pastime," Driscoll says. "We're not going to roll up the carpet and never shop again, and I think that's the way the stocks were selling last week."

Driscoll says the Federal Reserve's 75-basis-point rate cut could put money back in the pockets of consumers, although many of them will continue to hunt for bargains.

Retail stocks also got a boost from an upgrade by Sanford C. Bernstein, which lifted the sector to an overweight rating.

"The retail sector has underperformed the broader market for the last three years, with severe underperformance last year," wrote Bernstein analyst Colin McGranahan in his research. "At current levels, the retail sector is bouncing along trough valuations, and we believe the group has largely discounted the challenges ahead."

He further noted that historically, retail stocks have outperformed early in a recession, starting from the point of margin erosion through the majority of the Federal Reserve's rate cuts. McGranahan expects the current cycle to be similar.

"While fundamentals are likely to be grim, the stocks show more promise," he wrote. "We recommend that investors begin to increase exposure to retail broadly, with the view of averaging down on near-term weakness."

McGranahan upgraded Home Depot (HD) , Lowe's (LOW) , Bed Bath & Beyond (BBBY) , Williams-Sonoma (WSM) , Kohl's (KSS) and Macy's (M) to outperform from market perform. Each of those stocks gained at least 5% Tuesday.

Up until now, retail stocks have been hovering near 52-week lows amid mostly negative news. On Monday, discount chain Target (TGT) predicted its January same-store sales, or sales at stores open at least a year, would come in at the low end of its forecast of down 1% to up 1%. The company has already said that its fourth-quarter earnings will be lower than last year.

The past two weeks have seen chains such as Kohl's, Coldwater Creek (CWTR) and American Eagle (AEO) cut their fourth-quarter profit forecasts, while Tiffany (TIF) and J.C. Penney (JCP) have projected results at the low end of prior views.

That news has sent stocks to bargain basement levels. Adrienne Tennant, an analyst for Friedman Billings Ramsey, says that retailers that have posted good news have received little reward from investors, while companies that report bad news have taken a much harsher beating than necessary in some cases.

She points to apparel chain Urban Outfitters (URBN) , which earlier this month posted a 9% increase in same-store sales for November and December, but saw its stock price barely budge from the news.

Then there's struggling women's apparel chain Coldwater Creek, which had been warning all along of weak sales. Yet when the company's numbers finally came out earlier this month, shares plunged 25%, as if the news had come as a surprise.

"I think there is a disproportionate risk-reward," Tennant says.

Marshal Cohen, an analyst for research firm, the NPD Group, says too much of what's being evaluated for retail stocks is on a day-to-day basis, leaving very little wiggle room.

"It's almost like operating under microscope," he says.