Analysis: Beaten-down U.S. retail stocks may still be too pricy for investors

Altex Industries

24/05/2022 06:00

(Repeats ANALYSIS originally published on May 23, no changes)
    By Lewis Krauskopf and Sinéad Carew
    NEW YORK, May 23 (Reuters) - Shares of U.S. retailers and
consumer-oriented stocks took a beating last week, but may not
yet be low enough to tempt long-term investors who remain
worried about whether surging inflation will continue to hurt
corporate bottom-lines and cause shoppers to cut back.
    Last week, consumer staples  .SPLRCS  dived 8.6% and
consumer discretionary  .SPLRCD  tumbled 7.4%, the biggest
declines of any S&P 500 sectors, with inflation hammering
corporate results. Shares of some companies fared far worse,
with Walmart  WMT.N  swooning 19.5% for the week and Target
 TGT.N  plunging 29% after disappointing results.  urn:newsml:reuters.com:*:nL3N2X927U
 urn:newsml:reuters.com:*:nL3N2XA1XU
    Investors worry more declines could be in store if consumers
cut spending in the face of higher prices. Among earnings
reports due this week are Best Buy  BBY.N  on Tuesday and Dollar
General  DG.N  and Costco Wholesale  COST.O  on Thursday. 
    “I think it has been a wake-up call to investors that the
consumer is being impacted by higher inflation ... sooner than
what I think the Street was anticipating,” said Robert Pavlik,
senior portfolio manager at Dakota Wealth Management. “We are
only at the beginning of people trading down and changing their
spending patterns.”
    The latest consumer price index jumped 8.3% on an annual
basis. Prices for gasoline stand more than 50% higher than a
year ago, according to AAA.  urn:newsml:reuters.com:*:nL2N2X315F
    The Fed has promised to keep raising U.S. interest rates
until inflation is squashed, a key factor hitting risk appetite
for investors and putting the S&P 500 on the cusp of a bear
market, defined as a 20% decline from its record high.
 urn:newsml:reuters.com:*:nL2N2XC1NH
    Kim Forrest, chief investment officer at Bokeh Capital
Partners, believes surging oil and gasoline prices will keep
undermining consumer spending.
   "I'd be very cautious of discretionary retail at this point,"
she said. "So many people are affected by high gas prices and
high fuel prices."
    A survey by Morgan Stanley found that more than half of
consumers plan to cut spending over the next six months due to
inflation. The bank said most cuts were expected to come from
categories such as dining out and footwear and apparel.
    To be sure, the slump in share prices has made valuations
more tempting. The forward price-to-earnings ratio for the S&P
500 retailing index  .SPXRT , for which Amazon  AMZN.O  makes up
half the weight, has come down to 25.4 times from 33.9 times at
the end of 2021, according to Refinitiv Datastream. 
    Peter Tuz, president of Chase Investment Counsel, said he
would likely take a closer look in coming days at whether Target
shares warrant buying after sliding 25% the day of its earnings
report.
    "A stock like Target, when it falls 25%, you ought to look
at it," Tuz said. "You may decide not to buy it, but it’s one of
America’s premier retailers."
    Mona Mahajan, senior investment strategist at Edward Jones,
said that while the "risk/reward is certainly getting more
interesting" in retail, she wants to see evidence of ebbing
inflation.
    "While we're seeing interesting opportunities forming, we'd
like to have some confirmation of the inflation story before we
really step in," Mahajan said.

 (Reporting by Lewis Krauskopf and Sinead Carew; Editing by Ira
Iosebashvili and David Gregorio)
 ((lewis.krauskopf@thomsonreuters.com; 646-223-6082; Reuters
Messaging: lewis.krauskopf.thomsonreuters.com@reuters.net,
Twitter: @LKrauskopf))