by Michael Tarsala
Many former momentum-stock favorites in the retail sector are looking weak as we start the third quarter of 2012, notes Mike Arold, manager of the Technical Swing model at Covestor.
Some started their declines weeks ago, including luxury-retailer Coach (COH), down 28% since the start of April. It was a company that looked as if it could do no wrong just a quarter ago. Now, analysts at Wedbush started covering the stock last week with a “neutral” rating, citing potential for lowered earnings estimates amid a weaker retail environment.
Yet there’s also a new batch of former momentum retail names that have begun to decline just in recent weeks, he notes, including Under Armour (UA), Coach (COH), Ross Stores (ROST), Chipotle Mexican Grill (CMG) and Lululemon Athletica (LULU).
“The market doesn’t like the momentum stocks right now, and especially the ones with high valuations and short interest, like CMG and LULU,” Arold said. “I think those are the ones that are headed lower. Once these momentum stocks start to fall, they can fall hard.”
It’s true, Chipotle and Lululemon each trade at more than 28 times forward earnings, with 9% and 24% short interest, respectively.
But why the worry about those things all of a sudden?
Nike’s earnings miss last week played a role. It’s a company that rarely misses, beating analyst expectations in 17 of the 18 past quarters. The company said on its conference call on Thursday that it expects China’s economy to slow down, fluctuating labor and commodity costs, and currency pressures in Europe — all problems that may apply to retailers other than Nike.
That may be playing into earnings guidance fears, Arold says. Institutional investors may now be taking a second look at stocks with high forward valuations in the group, as even a slight growth slowdown over several quarters may make it harder for some companies to grow into their multiples.
Partly as a result, Arold sold out of Chipotle at $391, a stock he favored as a potential breakout candidate in late June. He was able to turn around and short the stock, he says, making up a portion of the loss he suffered going long.
He also shorted Lululemon as a new position last week. The stock declined amid market chatter that hedge fund manager David Einhorn took a short position on the athletic-wear maker. The company declined to comment to Investor’s Business Daily about the market rumors.
As Arold notes, Einhorn has gotten involved with other former momentum stocks including Green Mountain Coffee Roasters (GMCR) late last year, when he started to question the company’s accounting and its business growth strategy.
GMCR shares are down more than 80% since last year’s peak, as it has sales have taken a hit and the company continued to face questions about its accounting from another hedge fund manager, Whitney Tilson, as of May.
