Stocks have taken a pause to reflect on some economic numbers and earnings. It seems investors are caught between optimism for what the fourth quarter holds for consumers and the rising risk that the U.S. isn’t immune from the global slowdown.
There are plenty of ways to argue both for and against a strong Q4, but I’m here to talk about stocks.
And right now, one thing that is certain is that in nearly every article out there, people are talking about the strength of the U.S. consumer and how they are keeping this market alive.
I talk about our consumer-driven economy all the time in Growth Investor myself. But the reality is, it can’t save the entire retail sector. Some stores are doing well, but this rising tide isn’t lifting all boats.
Below are seven retail stocks to avoid for the holidays. These are stocks that have either run their race or can’t keep up with the competition. Whatever the reason, they are all “F”-rated stocks in my Portfolio Grader, and not worth the risk in your portfolio.
Retail Stocks to Avoid: Chico’s (CHS)
Chico’s (NYSE:CHS) is a women’s clothing retailer that includes brands Chico’s, Soma and White House Black Market. It started in 1983 as a direct-mail catalog firm that got traction and then began to open stores around the U.S. in upscale locations.
CHS was on the leading edge of casual work clothing, especially for the baby boomer set, as power suits were giving way to more comfortable and interesting clothing and accessories.
The trouble is, the company’s demographic is shrinking and the generations that are taking the boomers’ place aren’t interested in what CHS is selling. And its faithful customers now have other options. Plus, having a brick-and-mortar footprint is expensive.
The stock is off 556% in the past year and doesn’t look like it’s going to reverse that trend, especially if the economy slows.
Macy’s (NYSE:M) is a retail giant. But its stores are more like a physical manifestation of what most shoppers can get off a retailer’s website. And managing that website is a lot cheaper.
That’s the big problem for all these big department stores. They are having trouble adapting to life on the web. The efficiencies are there, not in huge stores that have to pay for the space, employees and merchandise. And operating margins are a key factor in my strategy for finding market-beating stocks.
Yet, because they didn’t move fast enough, e-commerce giants like Amazon (NASDAQ:AMZN) stole their business as did more focused online merchants, because shopping on the web is much easier than roaming a giant store.
Macy’s gets it now, but the question is, is it too late? The stock is off 55% in the past year, and there’s no reason to risk a good Q4 at this point, when other stocks show more promise.
Kirkland’s (NASDAQ:KIRK) is a Tennessee-based furniture store that now operates in 37 states. And it’s a company that is a direct victim of the U.S.-China trade war.
And the thing is, China is less worried about furniture than it is agricultural demands like soybeans and pork. That means KIRK, and other stores like it, are going to have to take a 25% hit on about 25% of their merchandise that comes from China.
This has already hit their bottom line and it doesn’t look like these tariffs are going to go away anytime soon. At this point, KIRK has already guided lower for the rest of the year and had to adjust its margins, since those will be hit as well.
This is tough for mid-sized retailers like KIRK, since they can’t just go out and find new suppliers. They are too big and it takes a while to turn the ship.
The stock is off 86% in the past year and won’t likely recover much ground until it can turn the ship or the trade war ends.
Tile Shop Holdings (TTS)
Tile Shop Holdings (NASDAQ:TTS) should be in a great spot now. Consumers are confident, rates are low and the housing market is suffering more from lack of listings than lack of interest.
However, TTS stock is off 75% in the past 12 months. Part of this was due to the hit last year, as interest rates were rising. But even in the past month, the stock is off 45%. That’s not a good trend.
And in late October, TTS announced that it was voluntarily delisting, an unusual move for any stock. That certainly doesn’t bode well for the company. It continues to lose money, quarter after quarter.
This is one falling knife that you don’t want to try to catch at any price. There are much better opportunities out there.
Stein Mart (SMRT)
Stein Mart (NASDAQ:SMRT) was founded 111 years ago in Jacksonville, Florida by a man named Sam Stein. It now has around 280 stores in 30 states.
Usually, any company that has been around for over a hundred years has been able to adapt, getting through world wars, recessions, the Great Depression and any number of other issues.
But it seems e-commerce has been the undoing of SMRT. It’s not time to count SMRT out yet. The stock is off 63% in the past 12 months, yet only 27% year-to-date.
On the upside, it has recently announced it will be carrying Amazon Lockers at its stores (a secure place to pick up goods you order from Amazon) to help drive traffic. And it should also get some help from the demise of Sears and other department stores.
But until those changes start helping the company in a visible way, it’s not worth bottom fishing.
Walgreens (NASDAQ:WBA) is one of the leading drug store chains in the U.S. and the United Kingdom.
Part of the Dow Jones Industrial Average’s loss last week was due to selling in WBA stock. It reported Q4 fiscal earnings earlier in the week and guided lower for 2020. And while it hit its earnings number, Walgreens fell short on revenue.
Some of the challenge for WBA is the fact that it’s going to have to deal with the currency issue of its European operations, especially the weakness in the British pound, as well as Brexit uncertainties.
There’s also the fact that the U.S. has yet to do anything about its healthcare issues. That’s certainly fine for WBA right now, but this state of limbo won’t likely last much longer.
The stock is off 25% in the past year, so its 3.3% dividend isn’t much of a temptation here. The best idea is to steer clear and wait for something to change the current slow growth and existential risks. In the meantime, I’m looking elsewhere for compelling growth plays.
Signet Jewelers (SIG)
Signet Jewelers (NYSE:SIG) is a jewelry company that runs the brands Zales, Kay, Jared and Piercing Pagoda. It also has an international segment that reports in British pounds.
Its biggest problem is two words: shopping malls.
Most of its operations in the U.S. are based on shopping malls. And if you haven’t noticed, as large department stores have struggled and disappeared, so too have the shopping malls that they usually anchored.
Lack of foot traffic is something that makes SIG stores struggle. And then you have the rise of e-commerce, which also means smaller companies can compete without having the enormous overhead.
And international operations have been hurt by the strong dollar, especially the Brexit-battered British pound. That doesn’t help earnings either.
The stock is off 71% in the last year, so its massive 9.2% dividend doesn’t do much to take the sting out of that loss. And there’s still more downside than upside.
At the end of the day, retail has become a difficult business in which it’s difficult to deliver the earnings as well as operating margins I’m looking for.
That’s why I’m looking elsewhere for growth plays. One of my favorites is a tech trend that is already bigger and deeper than most people realize.
‘The Mother of All Technologies’
Up until now, technologies have certainly made our lives easier and more efficient … but with a lot of room for human error. People trip over cords, spill their coffee and get tired.
Artificial intelligence does not.
If that sounds futuristic, well then, the future is already here. If you use apps like Netflix (NASDAQ:NFLX), TurboTax, QuickBooks, Zillow (NASDAQ:Z) or even an email spam filter, then AI is already helping your day run more smoothly. And as scientists find even more applications for artificial intelligence — from healthcare to retail to self-driving cars — it’s incredible to imagine how much data will be involved.
To create AI programs in the first place, tech companies must collect vast amounts of data on human decisions. Data is what powers every AI system.
So any one company that can help with customers’ data issues is the one company that’s most worth investing in.
You don’t need to be an expert to take part. I’ll tell you everything you need to know, as well as my “buy” recommendation, in Growth Investor. My No. 1 stock for the AI trend is still under my buy limit price — so you’ll want to sign up now. Get in while it’s still cheap.
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Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.