BLOG: Retail Plays For Bad Times

Manage
1

EXCERPT

Retail stocks have been getting hammered and consumers remains under heavy pressure. That should delight doctrinaire contrarians. Buying when times are bad can definitely produce great results down the road, so this may, indeed, be a good time to look for retail bargains. But since we don’t yet know how close or far we are from a significant bottom, such investing is best approached with careful and discipline. Presented here are 10 stocks, some well known with others flying under the radar, produced by a model that has shown an ability to cherry-pick within this presently-beleaguered group. FULL ARTICLE.

BY: Marc Gerstein

CATEGORY: Sector Spotlight

2

Marc,

This is an interesting approach! Are we at a bottom now, or is there a ways down to go?
I wanted to test this idea by seeing how it would have performed back in the ‘01 and ’02 Bear market. In other words, what would have happened if we had used this approach starting 3 months before the first of that market’s triple bottom? What happens if instead we wait until 6 months later to buy, or 6 months after that? When would this approach have worked, and by how much?

So I copied your Ranking System and developed a Screener that duplicated your 10 stock list. Since we don’t have a “Retail” sector to use as a universe it was a little difficult to determine which industries you used. There are 8 industries in the retail list, but by using 4 of them I was able to reproduce your list and in the same order. I used the following Screener filter rules:

MktCap > 100
Industry = RTAPRL or Industry = RTDEPT or Industry = RTFOOD or Industry = RTNONA

I set the Universe to; No OTC Exchange, and the Benchmark to; Russell 2000.

Assume that we bought the top stocks in mid April, three months before the first market bottom on 07/15/02, and held them for 1 year. I ran the Ranking System Performance of your system using my above screen starting on 04/13/02 through 04/19/03 using 1 year rebalance, and 15 buckets (there were only 153 stocks that passed the Screener on 04/13/02). I got -18.5% annual return (Ouch!), about the same as the Russell 2000 at -17.7% over the same time period. I re-ran it rebalancing every 4 weeks and got -9.2%, a lot better.

I then repeated the test starting 6 months latter on 10/12/02 and I got +50.5% (Now we’re talking!) while the Russell 2000 got +52.7% (oh, about the same). Rebalancing every 4 weeks achieved +42.6%.

I repeated it starting on 04/12/03 (1 month after the 3rd bottom) and I got +81.9% (that’s pretty darn good for a bunch of retail companies) compared to the Russell 2000 +57.1%. Rebalancing every 4 weeks achieved +69.4%.

I then ran it over the 2 years from 04/13/02 to 04/17/04 rebalancing every 4 weeks and I got a +21.7% annual return while the Russell 2000 achieved +15.9% over the same 2 years.

Bottom line: If we pick the right time to start and hold for 1 year we can significantly outperform the Russell 2000. If we start at the wrong time we will do about the same as the index. If we rebalance monthly we might be able to outperform the index in down markets, but under perform in some up markets.

So, what do we do now?

Denny :sunglasses:

3

First off, I have a real soft spot for this group so if you ask me too any questions, I can drone on like Bill Clinton after being asked to make a speech longer :smiley: That comes from the fun i had covering it in the '90s and success my screens had in the early '00s picking up retailers nobody (back then) cared about but which went on to bigger and better.

So I’m happy with a model that does well in good times but in bad times, more or less matches the Russell 2000 (I can live with that sort of bad-timing penalty; I wanted to get rid of the significant underperformance). It’s interesting that you sawpretty much the same thing with different tests run on the modified universe. That’s encouraging.

Anyway, I am starting to feel more bullish. I’m adding to DUG (the ultra short oil ETF) based on what I think is major demand destruction unfolding. And I’m starting to get longer in stocks in general, including retailers.

I’m still undecided – and somewhat scared – about finance (even rallies have their laggards), but that’s a gut reaction. I really need to look harder. Will head for the National assoc of Realtors web site to look at the affordability data that, back in '06, showed there was no way housing prices could hold (the association told me they buried it on the ste because they were embarrassed by the conclusions and worried they would be dismissed as irrelevant – no kidding!) I want to see where the numbers stand now. If I see something interesting, perhaps i could go over it in a blog. That won’t show much on finance (which took on more damage than can be cured by a turn in home probably prices), but any relief in housing can help,since it has a big multiplier effect in GDP.