James Dennin, Kapitall: China's Cyber Monday makes ours look like just another weekday, but should US retail stocks worry?
It's no secret that Americans like their sales. Ever since the invention of Black Friday – a day when the inside of American retailers take on the look of a war zone - sales have grown steadily, perhaps to their breaking point.
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Today China is expected to blow that out of the water. After the Chinese online retailer Alibaba began offering its inaugural November sales (an attempt to replicate America's shopping flurry around the holidays), China's version of Cyber Monday has ascended to overtake the sales of America's two biggest shopping days combined.And most sales are focused on this one, giant, online retailer. It's important to mention that a lot of the actual products purchased on Alibaba's websites still come from American companies. And since anyone who's been to a Duane Reade (WAG) in the last week or two knows that the holiday season is imminent – we decided to start compiling lists of promising retail stocks who might be set for a Christmas surge. Investing ideas Beginning with a universe of about 100 stocks that are specialty retailers, we wanted to look for signs of growing profitability before the holiday shopping season. One of the standard measures of profitability is the ever-popular metric, return on equity (ROE). However there's a big problem with ROE, because a company can boost the statistic by borrowing money. To get a more holistic measure of how good a company is at generating profits – the Dupont Corporation (DD) came up with a more refined statistic, the Dupont Breakdown: ROE = Net Profit Margin x Asset Efficiency x Financial Leverage By taking into account a company's profits, how well it's using assets on hand, and how much it is borrowing; investors can get a more reliable indicator of whether a company is becoming more profitable. A company with an encouraging Dupont breakdown is typically seen as making better use of its resources – which is a potential indicator that the stock may be ready to grow.