#$xrt

A popular retail ETF just broke out to all-time highs -- but is the breakout for real?

Among the many sectors enjoying a strong day yesterday was retail stocks. In fact, after many years of lagging performance, yesterday put a bow on a nice comeback story for the space of late. At least, that may be the conclusion drawn from yesterday’s action in a popular retail ETF, the Retail SPDR (ticker, XRT). We say that because after a 3-year trading range, the XRT finally broke out yesterday to a new all-time high, eclipsing its former highs from 2015 around the $51 level.

While it looks pretty on the chart, the question is will the breakout be sustained? We have observed, in recent years, the tendency for stock breakouts to fail more times than not -- at least in the near-term. Will that be the case here? It remains to be seen, but we’re already seeing XRT pull back by as much as 3% this AM.

So are we playing this breakout -- and if so, how? In a Premium Post at The Lyons Share, we detail our game plan for this sector, including the key levels to watch on the XRT.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Plus, our Pre-FALL Sale (25% OFF!!) is going on now so it’s a great time to sign up! Thanks for reading!

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The stock of Walmart has dropped down to test the level of its November breakout to all-time highs.

Back in October 2015, the stock of Walmart was in the throes of a decline so bad it had folks wondering if it would be “Always Low Prices” for WMT. Due to a profusion of potential technical support factors near the $60 level, just below its price at the time, we didn’t see it that way.  Indeed after a brief test, WMT would rebound. And by last November, the stock had recovered all the way back to its all-time highs set in early 2015 near $90.

From November:

We noted this accomplishment in a post last November. In a Premium Post at The Lyons Share, we also speculated on what might be next for the stock, at least ideally:

“What’s next for Wal-Mart? Is the run over — or will a possible breakout kick-start a new substantial advance above previous highs.

First off, given the prominence of the former 2015 all-time highs in the vicinity of the $90, some consolidation or pullback from this level would not be surprising. In fact, as we have mentioned before, it would actually be a healthy development. An attempt at a breakout above the $90 level without some consolidation first would not likely be sustainable. After more than a 60% rally over the past 2 years — and nearly 40% just in the past 10 months — the stock likely lacks the necessary fuel for an immediate successful breakout and new durable up-leg.”

Well, the stock laughed at our idealism and continued to march directly higher, reaching as high as $110 by the end of January. But, as we surmised, that breakout, without resting first and refueling, has now been completely unwound. And we currently find the stock testing back near the breakout level around $90.

If you’ve followed us for awhile, you know that we are fond of buying tests of breakout levels. As such, from a risk/reward standpoint, this may be an attractive spot to pick up some WMT stock on the price rollback.

In another TLS Premium Post, we take a deeper dive into some of the other important factors on WMT’s chart, and a specific strategy for this particular trade.

If you are interested in the Premium version of our charts and research, check out “all-access” service, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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Following a brutal fall 2 years ago, the stock of Walmart has made a full recovery, back to all-time highs.

Exactly 2 years ago, Wal-Mart (WMT) was the laughing stock (pun intended) of Wall Street. After hitting an all-time high above $90 to begin 2015, the stock would begin a brutal descent that would ultimately shave some 40% off of its value. At the same time, while the broad stock market was coming off a wicked drop in August-September, it had recovered to a great extent by November. Wal-Mart, on the other hand, as we noted in a post at the time, had Fallen And Could Not Get Up.

That said, we also noted that Support Was On The Way -- chart support to be exact. Consider it the Life Alert of the securities industry. Specifically, we noted multiple potential levels of support near the $60 area as displayed on this chart at the time.

As it happens, WMT stock was indeed able to press its “Life Alert button” soon thereafter. Within a few weeks, following a brief dip below that $60 level, the stock began to recover and has been on the mend ever since. And finally in recent days, after 2 long years, Wal-Mart stock was able to climb all the way back above the $90 level, closing at an all-time high for the first time in nearly 3 years.

So in a veritable triage of sickly looking retail stocks, Wal-Mart is at least one bright (blue?) light. Perhaps investors of other retail stocks may take comfort in the fact that while the stock of Wal-Mart, too, was once left fallen and lifeless, all hope is not lost. At some point, these stocks are bound to hit a Life Alert button of their own, i.e., a confluence of significant chart support.

What’s next for Wal-Mart? Is the run over -- or will a possible breakout kick-start a new advance well above previous highs. In a Premium Post at The Lyons Share, we provide our objective, technical read on WMT’s chart and the next potential opportunity for WMT investors.

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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November 6, 2017

Corporate America continues to exceed expectations as the bulk of the earnings season winds down. Both sales and earnings beats are above their historical averages as the global economy continues to pick up helping top-line beats, while also creating incremental margins to assist the in bottom-line beats. Before the earnings season started, Q3 expectations were reduced rather significantly on worries over U.S. growth and falling energy prices. But since then, the realized U.S. data points in October have rebounded and the hurricane storm impact was evident but absorbed. Looking forward, the Technology and Materials sectors look well positioned to benefit from GDP growth, while the Energy sector could be the giant upside surprise for Q4 should commodity prices continue to bounce. (And don’t forget to factor in this weekend’s episode of the Saudi Game of Thrones which could push energy even further.)

While equity investors focused on corporate earnings, many others fretted over the House’s tax reform package. I still see major tax reform as highly unlikely so didn’t spend too many hours reading up on the details. There is no bigger fan of tax simplification than I, but if Congress is going to tackle one of the biggest items in politics, it will need a very organized, well thought out plan with significant leadership backing. What I saw looked more like a 2nd grader’s science fair project that was assembled by sleep deprived-parents at 2 am. And cutting taxes on pass-through entities and eliminating AMT? I can only guess whose idea that was. But even with dynamic scoring, the current House plan will add $1 trillion to our U.S. debt levels. So, I can’t believe that this is anything that fiscal conservative members of Congress will vote for.

The good news is that the markets absolutely do not care. The jobs report was good. Three percent GDP looks to be on track. Short-term interest rates are agreeing and moving higher. There is a new head at the Fed and the Bond market is calm about the change. And corporate merger and acquisition departments are busy looking past Washington and moving forward with strategic deals. (Broadcom/Qualcomm, Marvell/Cavium, CVS/Aetna and now Disney/21st Century Fox.) So, ignore the clouds and fog and keep your eye on that landing ramp and all will be fine.

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October ended strong and November has grabbed the baton…

@JBoorman: $SPX starts November the same as the previous six months, with a higher high and higher low.

When ‘Sell in May and Go Away’ doesn’t work, get long…

Throughout the year, we have been highlighting a now considerable list of positive studies suggesting that US equities will likely finish the year higher. The longer-term outlook for US equities remains positive. SPX rose more than 8% during May-October. This period is often considered the “weakest 6 months of the year”; when SPX has done well during this period, the next 6 months have also been strong, with SPX gaining a median of 12% and closing the period with a gain 91% of the time (next two charts from Stock Almanac).

(The Fat Pitch)

And year-end seasonality is not just a U.S. thing…

(Daily Mail)

Focusing on earnings, look at the recovery in Q3 earnings as companies have crushed their quarters the last three weeks…

(JP Morgan)

Very interesting to see the surprises in the Energy sector…

To date, 81% of the companies in the S&P 500 have reported actual results for Q3 2017. In terms of earnings, more companies (74%) are reporting actual EPS above estimates compared to the five-year average. In aggregate, companies are reporting earnings that are 4.8% above the estimates, which is also above the five-year average. In terms of sales, more companies (66%) are reporting actual sales above estimates compared to the five-year average. In aggregate, companies are reporting sales that are 1.2% above estimates, which is also above the five-year average.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the third quarter is 5.9% today, which is higher than the earnings growth rate of 4.4% last week. Upside earnings surprises reported by companies in multiple sectors (led by the Information Technology sector) were responsible for the increase in the earnings growth rate for the index during the past week. Overall, six sectors are reporting earnings growth, led by the Energy, Information Technology, and Materials sectors. Five sectors are reporting a year-over-year decline in earnings, led by the Financials sector.

(Factset)

And some great conference call data points that give great insight…

“From an end market perspective, virtually all improved during the quarter. Aerospace, fabricated metals and oil and gas continued to show strength while other end markets like heavy truck and agriculture which had bottomed out several quarters earlier are improving. In general, as customer sentiment remains positive and the industries hold the current levels, we should continue to see solid sales trends.” — MSC Industrial (Distributor)

“While competitive intensity remains high, several suppliers began taking prices up or signaling that price increases are likely in the coming months…what we are telegraphing here is a big bit firmer and more defined activity than what we have seen in past years at this point in time.” — MSC Industrial (Distributor)

“This is a broad-based growth…We’re really growing across the globe…better than we’ve seen in over five years. Really, really coming out of the recession was the only other time we saw this kind of growth number.” — UPS (Logistics)

“The data that we see has the ocean utilization at over 97%. So you have a high, high, demand environment now with capacity really becoming tight…then you get up in the air, this is the fourth consecutive quarter where you really had demand outpacing capacity.” — UPS (Logistics)

“In fact, Brent is already over $60. So as I like to say, I’m going to declare victory and retreat. In terms of what has to happen now for there to be increased investment, I think it’s going to happen…I think what’s going to happen – what’s happened is that there has been an enormous, enormous underinvestment in productive capacity worldwide. It’s breathtaking how big that underinvestment has been.” — Loews (Conglomerate)

(AvondaleAM)

Texas Roadhouse is seeing much more labor inflation than it predicted…

The Louisville-based casual-dining chain said that its same-store sales increased 4.5 percent at company locations in the period ended Sept. 26. They increased 4.7 percent at franchise locations…

But margins as a percent of sales fell 31 basis points to 17.8 percent, the company said, as higher wages offset lower food costs.

Revenue at the company increased 12.2 percent to $540.5 million, from $481.6 million a year ago. Net income increased 20.8 percent to $31 million or 43 cents per share, from $25.7 million, or 36 cents…

The company increased its outlook for labor inflation, to between 7 percent and 8 percent, after previously saying labor would rise in the mid-single digits.

(National Restaurant News)

After a hurricane affected jobs number last month, the economy hopped back on track on Friday…

(Daily Shot/WSJ)

To read the full 361 Capital Weekly Research Briefing, please click here

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

Earnings season is wrapping up and retailers are the last to report. The environment was described as a "perfect storm" and "hyper-competitive" with no signs of slowing down. Retailers are trying to move into omni-channel and putting on a good face, but "the definition of loyalty in the retail business for the consumer is the absence of the better alternative." Consumers will shop wherever they can find the lowest prices at the greatest convenience. At the moment Amazon is the elephant in the room.

Next week begins the summer doldrums for earnings, so we'll likely take the next two weeks off. Be back again in September.

The Macro Outlook:

We are beginning to see some inflation in food

"after several quarters of lower commodity costs, we are beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we have seen in recent quarters." --Jack in the Box CEO Lenny Comma (Restaurants)

The transition has been a little more rapid than normal

"the transition from deflation to inflation has been a little more rapid than normal, and there are certainly some categories where we are seeing more than 2% to 3% inflation...I wouldn’t say we are seeing anything out there today that would be overly difficult for our customers to pass along." --Sysco CEO Bill Delaney (Food Distributor)

Millenials are becoming key decision makers in businesses

"Most of our chefs and operators in our customer’s kitchen are millennials. They want different type of equipment." --Middleby CEO Selim Bassoul (Kitchen Equipment)

Financials:

Home Depot feels good about housing markets

"You know we continually look at months of supply, there is 4.3 months of supply in the market of housing availability against a historical norm of six, that clearly is helping to drive improvement in home value appreciation...So, we see this housing favorability continuing as we look forward. And I think the watch out for us is, you wouldn’t want to see affordability become an issue, but that at this point doesn’t seem to be a concern for us at all." --Home Depot CEO Craig Menear (Home Improvement)

Mall rents are falling

"we think real estate prices a couple years from now are going to be less expensive than they are today. We’re starting to we’re seeing that as we renegotiate leases or relocate stores. The rents are coming down in all but the true A malls. So, if you take a look at the true A malls we actually think rents in those malls might actually go up...because they’re going to be in such high demand" --Dicks CEO Ed Stack (Sporting Goods)

Consumer:

The retail industry is in a perfect storm

"The retail market is currently in flux. The environment is highly competitive and dynamic...It’s a perfect storm right now" --Dicks CEO Ed Stack (Sporting Goods)

CEOs are trying to stay optimistic

"I also know that we operate in an environment of intense and disruptive competition, and that our customer has more shopping options than ever, and we need to provide her with a compelling and a unique proposition. So winning in this environment requires us to act with a great sense of urgency to make changes in how we operate and to move faster. And as we do this, I am confident that Macy’s will win again." --Macy's CEO Jeffrey Gennette (Dept Store)

They argue that omni-channel is essential

"The customer is clearly telling us that brick-and-mortar retail continues to be an essential part of the shopping experience and certainly when it is executed right with the right values. All of this gives us confidence in our long-term global store growth potential." --TJX CEO Ernie Herrman (Off-Price)

Out of sight out of mind

"there is an impact on a market when you have fewer stores in it and share of mind is therefore decreased, and as a result, those areas where we’ve closed stores, the rate of growth in our omnichannel business has been a little less...Everything that we’ve learned from that store closure pilot has been that reinforcing the importance of a great physical footprint. And we’ve said over and over again, and we have seen nothing that doesn’t support this. In fact, I think the thesis is growing stronger." --Kohls CEO Kevin Mansell (Dept Store)

But everyone is trying to match Amazon

"I think we are in the time of hyper competition. People are out there trying to get market share. They are doing things that one typically wouldn’t do in a business. I guess, the elephant in the room there, you know who it is, is doing an awful lot of things without regards of the bottom line and is getting rewarded for it. And so there are an awful lot of other people trying to do the same thing. So yes, I think there is margin opportunity. I think we could get there, but I also am very, very aware of the hypercompetitive space that we are in." --Urban Outfitters CEO Richard Hayne (Apparel)

The price competition is impossible to avoid

"We tried to not be promotional. We didn’t want to be the price leaders in the industry. And as things got competitive and somewhat unpredictable, the consumer told us that they felt that we weren’t priced competitively in the marketplace." --Dicks CEO Ed Stack (Sporting Goods)

Retailers are doubling down on promotions

"when you look at the marketing strategy...number one, we’re going to remain very promotional. And what we’ve spent a lot of time on is reducing the overlap of promotions, reducing the amount of overlap of discounts on top of each other. But we’re doing that all the way through the back half and that really is a big focus of ours." --Macy's CEO Jeffrey Gennette (Dept Store)

Consumers are only as loyal as your prices

"We didn’t start the promotion, but we can’t sit around and pretend it doesn’t happen. We need to engage in that. And our customers have told us, you need to engage here in today’s marketplace...I’m a firm believer that the definition of loyalty in the retail business for the consumer is the absence of the better alternative." --Dicks CEO Ed Stack (Sporting Goods)

The competition shows no signs of slowing down

"The pace of change in the consumer and competitive environment doesn’t show any signs of slowing down." --Target CEO Brian Cornell (Big Box Retail)

If anyone can challenge Amazon, it should be Walmart

"We continue to gain traction in e-commerce with Walmart U.S. GMV up 67%...we continue our transformation to become more of a digital enterprise that moves with speed and agility...We’ve seen strong results from the rollout of online grocery...Marc Lore and the team delivered another quarter of robust topline growth" --Walmart CEO Douglas McMillon (Big Box Retail)

Technology:

Home Depot spends half its advertising budget on digital

"Our overall advertising spend is up, lower single digits, but as we’ve essentially made more significant pivot to digital marketing it’s over half our marketing right now. That’s a medium that you can get good insight on the return on your spend and as Craig said, the team just done a great job continuing to increase the return on that spend, so leveraging that low single digit to a much more productive return on overall ad spend" --Home Depot EVP Ted Decker (Home Improvement)

Apple products sold well at Target

"on the Apple comments, they weren’t just driven by tablet, they are driven across the board in categories. And we had really strong showing in Q2 on the iWatch which we worked with Apple on clearly. And we have a lot in our plans for Q3 and Q4 with potential new launches as I have outlined." --Target CEO Brian Cornell (Big Box Retail)

Online video has tailwinds to revenue, but headwinds to profitability

"more and more people are watching online video at longer and longer time, on a daily basis...and at the same time, advertising revenue has been increasing, and there is also an increasing willingness from consumers to pay. So, the subscription number as well as revenue has been increasing quite rapidly. On the other hand, the flip side of this is the cost of content has been increasing, even faster. So, what we see is that over time, we believe the content will continue to increase, but the rates would probably be lower. And the subscription, as we continue to increase, would deliver higher revenue per active user. So, we will get closer to a more equilibrium between cost and revenue at some point in time. But I think unfortunately at this point in time, the net loss of the business is still increasing." --Tencent President Martin Lau (Chinese Internet)

Neural Nets are improving at a double exponential rate

"A neural net in terms of complexity is approximately – not quite, but approximately doubling every year. And this is one of the exciting things about artificial intelligence. In no time in my history of looking at computers in the last 35 years have we ever seen a double exponential where the GPU computing model, our GPUs are essentially increasing in performance by approximately three times each year...And...on top of it, the neural network architecture and the algorithms that are being developed are improving in accuracy by about twice each year...And so you’ve got these two exponentials that are happening, and it’s pretty exciting. That’s one of the reasons why AI is moving so fast." --Nvidia CEO Jen-Hsun Huang (GPUs)

The next revolution of AI is at the edge

"The next revolution of AI will be at the edge, and the most visible impactful evidence will be the autonomous vehicle. Our strategy is to build a ground-up deep learning platform for self-driving cars, and that has put us in pole position to lead the charge" --Nvidia CEO Jen-Hsun Huang (GPUs)

Industrials:

All in all there was good industrial activity in the quarter

"positives around oil and gas...infrastructure, aggregates, cement positives; seeing positives in machinery OEMs, transportation equipment and paper and food...all-in-all, we saw good activity in the quarter" --Applied Industrial Technology CEO Neil Schrimsher (Distributor)

Materials, Energy:

Dry Bulk shippers are starting to feel more positive

"We’re generally positive about the market from the second half 2017 onwards and we believe that every subsequent year will fare better than the year before...environmental regulations will thereafter not only contribute to a transition towards a cleaner environment, but it will also assist shipping in reducing vessel supply and will therefore lead us to better markets as of 2020 onwards." --Star Bulk Carriers CEO Petros Pappas (Dry Bulk)

Miscellaneous Nuggets of Wisdom:

Take care of your customer on their terms

"What we’ve learned is a customer comes with a return, that’s their errand they have to do, and the more efficient, the faster we are in doing that, the more free time we’re giving back to the customer. And oftentimes, they take that free time and start shopping. So we’re really looking to take care of the customer on their terms, and if they have a great experience in our store with a return, we certainly believe that ends up in good news for us." --Nordstrom President Erik Nordstrom (Dept Store)

May 15, 2017

No one said that the flight path to higher returns would be easy. With the increase in uncorrelated asset returns, there are many different sets of positive returns out in the market right now. You just need to set the right flight path to snatch some of those better return streams. International stocks and Growth equities continue to provide the best airspace for returns as the U.S. cyclical recovery continues to slip. It appears with the latest news out of Washington D.C. that the legislative agenda for 2017 will slip into 2018. So with the potential to invest in International growth that is on the upswing, while U.S. growth is moderating, why wouldn’t investors allocate more assets overseas or into multi-nationals which will benefit more from a depreciating U.S. dollar? To me this looks like the easy approach, but if you want to make things more difficult and fly your plane upside down, then go ahead. There are plenty of ways to reach your destination right now.

It was a good week in Emerging Market stocks and bonds…

Maybe the Jeff Gundlach push helped, but we all know how cheap EM is versus Developed. The Nasdaq continued to roar led by Semis and the FAANG stocks. Small caps pulled in on Trump worries.

Remember the PIIGS? Well, they are back and they are very hungry to get in your portfolio…

@JLyonsFundMgmt: ChOTD-5/12/17 Euro “PIIGS” Testing 7-Year Highs $PGAL $EWI $EIRL $GREK $EWP

Among sectors, Semis jumped on several better-than-expected earnings reports. Energy bounced. Financials took the week off.

Looking at Friday’s 52-week lows in the Russell 1000 should tell you a lot about this market…

Clearly a massive secular rotation out of retail stocks as their top line comps are evaporating. Troubles with car rental prices and television advertising are also secular demand problems.

Try not to own stocks where the CFO needs to make the below statement on their conference call.

“Don’t count us out, we’re not dead,” Karen Hoguet, Macy’s chief financial officer, said in an interview.

(WSJ)

To read the full 361 Capital Weekly Research Briefing, please click here

Retail stocks don't have much to brag about over the past couple of years. Is this trend about to change, at least for Wal-Mart (WMT)?

Below looks at a chart of WMT over the past decade. As you can see, since the highs in early 2015, WMT has created a series of lower highs.

CLICK HERE TO ENLARGE CHART ABOVE

WMT has struggled to make upside headway inside of the falling channel highlighted above. Potential that WMT has created a "bull flag" pattern with a breakout test in play at (1).

If WMT does take out resistance, it could attract buyers to the stock and Retail ETF (XRT)

The “Trump Bump” will soon come to an end, and earnings will once again drive stocks higher or lower. Bulls think 2017 S&P operating earnings could hit $130 per share. Who knows if this happens? Even in times of relative stability, it’s foolish to predict the markets—and probably the only thing everyone can agree on these days is that our current situation is far from stable. There are too many variables, including uncertainties about the policies President-elect Trump will put forward, to have any clue where the market will wind up at year’s end. Will Trump succeed in cutting the corporate tax rate or start a crippling trade war with China? Will he “repeal and replace” the Affordable Care Act or throw the whole healthcare sector into chaos? Your guess is as good as mine, and anybody who claims to know is probably a partisan hack or a salesperson, or both.

One thing we can be sure of is that, as always, a handful of big movers will disproportionately impact the indexes in 2017. Last year Nvidia was that stock. I wish I knew what this year’s breakout name will be, but all I can offer with some certainty is that even if the indexes post another year of low double-digit increases, more stocks will struggle than flourish. Quite a few businesses could vanish altogether. Avoiding these laggards and soon-to-be zeroes is just as important to investing success as scouting for potential five or ten baggers. And one of the best ways to do so is to identify larger secular trends.

Austrian economist Joseph Schumpeter famously applauded the “creative destruction” aspect of capitalism, the method by which companies, and entire industries, go broke because a person or a company invents a better way of doing things. Analyzing this process is not easy. Nobody rings a bell alerting investors to sell stocks about to be disrupted into oblivion. If anything, as I’ve described before, they often appear temptingly inexpensive by valuation metrics such as price to earnings or price to cash flow just before they vanish. Moreover, analysts and pundits often encourage bottom fishing for seemingly cheap stocks in troubled industries. I still have a stack of bullish analyst reports recommending stocks in forgotten sectors like video rental stores, pay phones, and pagers. All of them cited attractive valuations. Most of the companies being recommended no longer exist.

Even businesses that manage to survive industry bloodbaths rarely, if ever, receive premium valuations again. Technology stocks are great examples. Disk drive survivors Seagate and Western Digital perpetually sell at low PE ratios, as do auto-industry survivors General Motors and Ford. If GoPro and Fitbit recover from last year’s drubbings, both are likely doomed to sell at a fraction of their once rich valuations.

Today, three industries (and others I have yet to identify) are facing severe disruptions. First, and foremost, is brick-and-mortar retailing. Hardly a week goes by without a high profile retailer reporting disappointing monthly or quarterly sales, followed by a stock price collapse. Macy’s and Kohl’s both rang in the New Year by dropping 14 percent and 19 percent, respectively, on weak Christmas sales. Meanwhile, e-commerce competitors, especially Amazon, are rapidly taking market share. Amazon’s 2016 revenues were over $135 billion, vs. $107 billion in 2015 and $89 billion in 2014. By comparison, Walmart’s 2016 revenues were about $486 billion, vs. $482 billion in 2015. In other words, the most powerful force in brick-and-mortar retailing over the last generation has virtually stopped growing while its main online competitor has been growing steadily at 20+ percent and shows no signs of letting up.

Many smaller retailers recently filed bankruptcy, including Pacific Sunwear, American Apparel, Wet Seal, Aeropostale, Sports Authority, Sports Chalet, and Fairway Grocery Stores. Existing public chains facing extinction include Sears, Gordmans, Bon Ton Stores, HHGregg, and Stage Stores. There will be more, and the survivors will sell at ever-lower valuations. This powerful trend prompted Wells Fargo to label the entire group as close to “uninvestable” following poor holiday sales and the just completed annual ICR retail conference in Orlando.  

The asset management industry is also facing headwinds. A secular shift toward indexing, plus the soon the be implemented Department of Labor “fiduciary rule” has led to declining assets and declining fees at most mutual fund companies. Assuming this trend continues, these firms will reduce or eliminate their stock buyback programs while others will cut or eliminate quarterly dividends. Historically, these companies have been highly profitable. Gamco paid its leader, Mario Gabelli, roughly $1 billion in cash over the last ten years. Most have minimal debt. But as revenues and profits shrink, price earnings ratios will also likely fall. The upshot is potential declines of 20-50 percent for many industry stocks. Unless these companies are bought out, most could (or should) underperform the market in the next 12-24 months.