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The Day Ahead: Sell First and Revisit Later

Spotlight: Retail

I am maintaining a net underweight/sell view on the retail sector (initiated late September) into the pickup in third-quarter earnings season this week. Price action in the sector continues to suggest caution is necessary. From a fundamental perspective, holiday related commentary from execs is sending mixed signals; the companies are sounding more aggressive with their inventory guidance but do not have the earnings outlooks to back up the planning. Companies could very well be resetting expectations, but given the multitude of macro considerations at the moment, Mr. Market is reading the scene as risk to newly lowered earnings outlooks (and, accordingly, is pricing that in by sending the stocks lower). A Santa Clause rally is currently nowhere to be seen. But, if you want to dance, here are some suggestions:

Long candidates: TJX Companies (TJX - Get Report) is looking for guidance to alleviate peak margin opinion on the Street. GameStop (GME - Get Report) \has a stronger release schedule with the forthcoming titles: "Halo 4," "Call of Duty" and "Grand Theft Auto 5" plus top titles had a better-than-expected quarter when circling back to publisher results. Foot Locker's (FL - Get Report) strong footwear cycle continues and Decker's horrible guidance basically confirmed the obvious.

Short candidate: Despite European conditions worsening in the quarter, there is too much optimism in Abercrombie & Fitch (ANF - Get Report). That is the main risk right now.
At the time of publication, Sozzi had no positions in the stocks mentioned, although positions may change at any time.

Brian Sozzi is Chief Equities Analyst for NBG Productions. In this capacity, he is responsible for developing independent financial content and actionable stock recommendations (including ratings and price targets) for an institutional and retail investor base. In addition, Sozzi is the Editor in Chief of the "Decoding Wall St." investor education online platform.

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