(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
This year has seen consumer discretionary stocks outperform the broader S&P 500, rising by approximately 6.6% versus 2.9% for the index, using the iShare Consumer Discretionary ETF (XLY) as a proxy. But not all stocks have performed well, and a technical analysis of four consumer stocks— Target Corp. (TGT), Home Depot Inc. (HD), Ross Stores Inc. (ROST) and Best Buy Co. Inc. (BBY)—suggest shares of each could fall by 10% or more from current levels.
It has already been a tough year for the four stocks, with three of the stocks underperforming the broader sector. Only Target has outperformed, but even shares of that retailer have now turned decisively bearish.
Target reported fourth-quarter results at the beginning of March, which turned bulls into bears, as fears of possible margin deterioration going forward crept in.
Target is fundamentally expensive for a stock with top-line revenue growth around 1–2% over the next three years, while earnings are only expected to grow by roughly 3% in 2018, and 2% in 2019. It gives the stock a one-year forward earnings multiple of 13 times 2019 estimates of $5.43 per shares, but when adjusted for growth, the PEG rises to an extremely high four. (For more, see also: Target Corp. Lowers Earnings Guidance for Q4.)
Target shares have been trending lower since April of 2016, and it appeared for a time that shares broke out of a downtrend. But resistance to this point has proven to be too tough for the stock to rise above $79.25. With the relative strength index reading around 45, it would suggest that the stock has further to fall before becoming oversold. Should shares of Target drop below $68, it indicates the stock could fall to $63.25, a decline of about 11% from the stocks closing price on March 16 of $70.99.
After peaking in late January, shares of Ross Stores fell with the broader market, and have yet to recover. Shares have continued to struggle since issuing full-year 2018 guidance below expectations. Technically the stock sits just above a critical support level at $74.20. Should the stock fall below technical support, it could fall towards $66.25, a decline of roughly 13.6% from its current price.
Best Buy also peaked in late January and has struggled despite reporting strong quarterly results in March. The stock is currently sitting at technical support around $68.95, and should the stock fall meaningfully below support it could result in shares falling roughly to $62.00, a decline of 11%.
An Investopedia article on March 8 noted that Home Depot could fall towards $160, and while the stock has continued to stay just above a technical support level around $177, the stock is still not out of the woods. Should the stock fall below support at $177, it could be headed towards $160—a decline of 11% from its current price around $179.
For now, all four of these stocks are exhibiting signs of stocks that have the potential for further declines. But should they be able to maintain current support levels, it could suggest a turn higher may be on the way.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.