As Sam Sees It: Bargain Hunting During the Busiest Shopping Periods of the Year

Sam Stovall  |

Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.

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EQ: In this week’s Sector Watch report, you discussed the adage of buying straw hats in the winter and overcoats in the summer. Essentially, finding bargains when things are out of season. This adage seems to apply to the retail space, both for consumers and investors. So in that sense, is retail not the best place for bargain hunting at the moment?

Stovall: If you use history as a guide, for it’s certainly not gospel, it would indicate that while retailers seem to be on the lips of investors as we enter into the all-important holiday gift-giving season, historically, the majority of them don’t end up doing all that well on a relative price performance basis in the latter part of the year.

In fact, six of the nine sub-industries in the S&P 500 beat the S&P 500 no more than 30 percent of the time in December. The worst-performing group in the Consumer Staples sector was the hypermarkets and supercenters, which beat the market only 10 percent of the time dating back to 1990. So while retailers might be on investors’ lips, they’re usually not on the best performers list at this point in time. So it could actually be a period in which you want to start considering purchasing retailers.

EQ: You broke down the frequency of outperformance for each of the consumer sub-industries. Historically, when is demand at its peak and when it’s bottomed?

Stovall: I looked at the 12 retail-oriented sub-industries, nine of which were in the Consumer Discretionary sector, and three of which were in Consumer Staples. I computed their price performances dating back to 1990, and examined the frequency of outperformance these sub-industries had when compared with the S&P 500. So, what was their batting average against the market in each of the 12 months over the last 24 years?

I found that the greatest number of sub-industries posted very weak frequencies of outperformance in December, yet a majority of them posted strong frequencies of outperformance in March. So it appears as if investors buy into these stocks over the third quarter of the year and do so additionally in the fourth quarter. They then wait for the fourth-quarter  earnings reports for retailers, which come out early in the new year. They also see what kind of gift cards were purchased for friends and family, and therefore, spent in that subsequent Q1. Hence the pattern suggested weakness in December, but strength in March.

EQ: So is everyone trying to get ahead of the curve in March to play the retail space?

Stovall: The strength in March implies that people liked what they heard about the Christmas buying season, and liked what they saw in terms of the cashing in of the gift cards. So if you’re looking to take profits, March is  probably the best month in which to do it.

EQ: You also screened for some potential bargain plays in the Consumer Discretionary and Consumer Staples space. What did you find? Were there any trends or sub-industries that stood out?

Stovall: Yes, there were. I created a screen using S&P Capital IQ’s MarketScope Advisor, which is our electronic research platform. I looked for all the retail stocks that have an analyst-driven recommendation of buy or strong buy, that also have a quantitatively driven recommendation of buy or strong buy. So using both the STARS and Fair Value rankings, I came up with 12 names, nine of which were in the Consumer Discretionary sector and three in Consumer Staples.

Industries that had a good number of representatives were Automotive Retail, as well as Apparel Retail. There was a smattering of representatives in Specialty Stores, Department Stores, and General Merchandise.

The two Consumer Discretionary sub-industries that have the worst relative outperformance statistics are Department Stores and Specialty Stores, yet we have some buy recommendations in these categories. Nordstrom, Inc. (JWN) is in Department Stores, and PetSmart, Inc. (PETM) and Staples, Inc. (SPLS) are in the Specialty Stores category. In Consumer Staples, the Hypermarkets typically is the weakest performer in December, yet we have a strong buy recommendation on Wal-Mart Stores, Inc. (WMT) .

EQ: About 90 percent of the S&P 500 has reported earnings. How did companies perform for the quarter?

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Stovall: Expectations were fairly light. The initial expectation was for a 3.2-percent year-over-year increase in operating earnings, but now it seems like we’ll be getting 5.5 percent. I think investors are breathing a sigh of relief once again because the actual results ended up beating expectations. We’re also seeing the percent change expected for all of 2014 has held up at around 11 percent. So I think analysts, too, are feeling fairly optimistic that we end up with a high-single digit, low-double digit increase in earnings for all of the coming calendar year.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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