Sifting Through the Retail Wreckage

Just a few months back the retail sector didn’t look all that tempting. Valuations had gotten fairly lofty by historical standards. Department stores like Federated, May, and J.C. Penney traded at market multiples when they traditionally price at a discount. Apparel retailers like American Eagle and Abercrombie, often thought of as fairly volatile to due the fickle nature of teen fashion, fit into the same category; sitting at the upper end of their historical valuation ranges.

Now with oil in the high sixties and Hurricane Katrina having ripped through the Gulf Coast, retailers have been hit fairly hard. As with any short-term downward pressure on Wall Street, opportunities come out of the woodwork. Wal-Mart, for the first time in years, now trades at a discount to the S&P 500. Abercrombie and American Eagle do too. Sears Holdings, after being unconventionally quiet for months since the Kmart merger, has been drifting down for a while (they report earnings on Thursday, so we’ll get more color on that situation shortly).

Several less well known retailers also have felt the heat, and often get hit more since small and mid cap stocks tend to be more volatile due to less predictability in their business trends. There is no doubt that high fuel prices are hurting lower income consumers, but growth retailers should be able to sustain the headwinds longer term. As far as the sector goes, investors should be worried when others are confident, and as is the case right now, confident when others are worried.