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Three Retailers to Short


Another disappointing holiday season approaches. Can these stocks survive it?

How is the consumer feeling?

Not so great, it turns out.

We learned this week that the Consumer Confidence Index (CCI) slipped to 47.7 this month from 53.4 last month. Consumers' perceptions of current conditions and their expectations for the future also fell.

Other reports on consumer mood appeared similarly disheartening: The ABC News/Washington Post Consumer Comfort Index (WCCI) dropped another point during the week ending October 24, bringing its total drop the past three weeks to six points.

This cements the index's decline into the lower end of its range for the year, economists note. (The index is based on three core questions, asking respondents to rate the condition of the national economy, the state of their personal finances, and whether or not now is a good time to buy things.)

Joe Consumer is feeling uncertain, and it's hard to blame him as he struggles with a lousy labor market, elevated debt levels, and depressed home prices, to name but a few of the challenges.

Just in case they weren't worried enough, here are a few more concerns consumers can now fret about: the cost of what they're eating keeps shooting up with tea, cocoa, sugar, and coffee prices hitting multi-year highs.

Prices at the pump are also jumping, with gas prices moving closer back to $3 per gallon.

What does this all add up to and what are the investment implications?

David Rosenberg of Gluskin Sheff puts it this way: "All of this leaves less cash left for discretionary holiday spending, which we think again will be a disappointment this year and leave the retailing stocks ripe for the picking for the 'shorting' investor population."

It's certainly true that the retailers have enjoyed a nice run. Indeed, the SPDR S&P Retail ETF (XRT), with holdings including Expedia (EXPE), Guess (GES), Nordstrom (JWN), Tiffany (TIF), and Whole Foods (WFMI), is up 30% in the past six months.

As for which retailers to short, we asked one of our professors with expertise in this space for some ideas.

In general, this pro argues that retailers have been really overbought, and she thinks valuations across the board are too high.

"I personally probably wouldn't even buy the most operationally and financially robust retailers right now given the price," she says, adding, "I think sales for the holidays have been overestimated, and I think we'll see a lot of retail stocks sink."
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No positions in stocks mentioned.
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