Doug Kass fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
- How the markets fared on the first day of the Trump Era.
- How he is now considering brick-and-mortar retailers.
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The market had a solid first day in the Trump Era with all three major indices up solidly as the 45th president of the United States was sworn into office. I have no idea where the country and market go from here, as one would expect when the biggest outsider since Andrew Jackson is now commander-in-chief. But I guarantee the ride will not be boring.
I wish the entire Real Money Pro community a nice relaxing weekend. If nothing else, there are two championship NFL games that should be more than entertaining on tap on Sunday.
We have just more than a hour to go in the last trading day of the week, and the first day under the new president. All major indices are in green as we head into the last trading hour of the week. Oil is up nicely and the rig count continues to increase domestically. Baker Hughes reports this week that the U.S. rig count rose by 29.
There was a good piece by Scott Gamm on TheStreet Friday about how repeal of Obamacare may be bullish for health insurers since the health exchange approach was unprofitable. Buying coverage will be a lot more agreeable to individuals' bottom lines. Of course, I personally think industry should never have colluded with the previous administration to get this monstrous policy passed and deserves the losses they took as a result.
In spite of the National Retail Federation raising its fourth-quarter holiday sales forecast to 4% as opposed to the original 3.6% number, nearly all retailers of consequence who have issued preliminary holiday sales results (Wal-Mart Stores (WMT - Get Report) , TJX Companies (TJX - Get Report) , Ross Stores (ROST - Get Report) , Best Buy (BBY - Get Report) , Bed, Bath & Beyond (BBBY - Get Report) and Nordstrom (JWN - Get Report) have not yet released estimates) have indicated weaker comparable-store sales at their brick-and-mortar facilities. The market has punished all misses at this juncture.
What exactly happened and what does it mean for this beleaguered retail group?
- Online had another strong season. Final numbers are not in, but online looks to have grown about +15%. This took all of the growth at retail and then some. Giant Amazon, who also has not released numbers and who does everything it can to hide what is actually going on, probably grew US general merchandise by over +25%. In simple terms, Amazon (AMZN - Get Report) ate everyone's lunch. I do not believe AMZN makes any money in conventional retailing. (It does profit from operating as a third party in fulfillment, a very high margin business). AMZN is a formidable competitor, to put it mildly, but everyone else is not going out of business. Most retailers are still solidly profitable and generate plenty of free cash flow.
- This was the year apparel went online. Most failed to anticipate this would happen - but it might create an opportunity for contrary investors. The problem with apparel is fit and color. Industry estimates suggest 30% of all apparel purchases are returned. Under certain circumstances, apparel sales online can be singularly unprofitable as returns and exchanges are annoying and quite costly for all parties. Indeed, AMZN's clear success in this category may pressure its margins (however this bothers CEO Jeff Bezos not at all and AMZN investors very little). It could annoy AMZN's usually quite satisfied customers. They might even return to brick-and-mortar shopping.
- Some retailer sales include food. This category is slow growing and has deflation at the current time. TGT, for example, has a significant and unsuccessful food business and reported down comps in that division. WMT will probably have the same experience.
- Categories included in general merchandise may have been strong and taken away strength from the remaining categories. These include auto and home related. I suspect firms like Lowe's (LOW - Get Report) , Home Depot (HD - Get Report) , AutoZone (AZO) and O'Reilly Automotive (ORLY - Get Report) had strong fourth quarters. Auto sales also took some consumer fuel and diverted it.
- With trade front and center in all investment discussions, the probability is high that apparel deflation is over or will get less bad. Deflation is NOT good for most retailers. Inflation is not either (I have been doing this long enough to remember LIFO accounting) but in small doses, inflation can be quite pleasing to retail investors. That scenario seems likely. Virtually all apparel sold in this country is imported, with Hong Kong the key transaction market for Asia.
Here are some of my retail updates over the last two months:
* "Another Mall Takes a Fall"
* "Sears' Latest Hail Mary Likely Will Be Dropped"
* "Fashioning an Investment Strategy From Retail's Wreckage"
* "How to Profit From Changing Channels of Distribution"
* "Retail Goes on Sale"
* "Nordstrom Notes"
However, given the above developments and the continued schmeissing of the stocks, we are approaching a valuation level that I think a number of retailers (e.g., M, JCP, JWN, BBY and BBBY) can all be bought.
I also expect that private equity is already looking at the sector.
While momentum and the charts are abysmal, valuations relative to the market and compared to interest rates are now at unusually attractive levels. Sentiment is as bad as it is likely to get in an environment where the domestic economy is presumed to be growing nicely. (All these bad things have happened in a nicely positive growth environment.) Yields appear safe and are competitive with bonds. All of these firms have online businesses that are growing as fast as the online industry. Some, like M, JWN and JCP, have significant real estate.
My hand is on the trigger ... to buy at a time where sentiment may be approaching a negative extreme.