Sears Stock Prices: Why You Should Stay Away
From Sears Stock
The Dynamic Wealth Report
November 8, 2010
Just the other night, I was talking with a friend who used to play pro
baseball.
He was an expert hitter… and before long, our conversation drifted to the
recent World Series and baseball. He said over and over again, the
difference between success and failure at the highest levels was mental…
It was all confidence.
When he stepped into the batter’s box, he had to have confidence. He was
of course facing off against some of the greatest pitchers of our time.
Confidence was the difference between hitting the ball and striking out.
The success of our economy also depends a lot on confidence.
It’s very tough to have a strong economy without confident consumers.
One of the most watched economic numbers is consumer confidence.
There are a handful of organizations publishing these statistics. ABC has
one confidence number, the Conference Board posts another, and the
University of Michigan publishes a third.
All of the numbers are determined in a similar way. A survey of
consumers is made on a regular basis. They’re all asked a series of
questions intended to gauge their confidence in the economy.
The more positive the response, the higher the numbers.
Why are these numbers so important?
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Remember, the US economy is driven mainly by consumer spending. Some 70%
of our economic activity is tied to consumers. Clearly, the more
confident consumers are, the more they buy… The more consumers buy, the
stronger the economy is.
How confident are consumers right now?
A quick look at the University of Michigan indicator shows confidence
numbers bottomed in the early part of 2009. Since then, confidence
levels have been slowly moving higher.
Despite the recent climb, we’re just now reaching the confidence lows
hit during the 1991 recession. And we’re a long, long way from the highs
set back in late 1999.
But the trend is telling…
I believe rising consumer confidence numbers mean this holiday shopping
season will be better than expected. Consumers are tired of not spending
money… Everyone cut back in 2008 and 2009.
And unemployment numbers are moving in the right direction (down!). It
allows consumers to breathe a little easier and open up their wallets
more freely. Add it all up and we’re seeing a number of reasons why
consumer confidence is improving.
Simply put, more confidence means more spending… and more spending is
good for the retail industry. You’d think retail stores are poised to
rise across the board.
But that may not be the case…
When I started looking at the retailers, I noticed something
interesting. It looks like many have already started moving higher. But
one company jumped out at me, not because it was undervalued, but the
exact opposite.
Sears Holdings (SHLD) looks incredibly overvalued.
Sears is so overvalued, I say stay away from this stock.
The numbers just don’t make sense. The first thing I looked at was their
P/E ratio. Sears’ ratio is a robust 27x while the industry is hovering
at a more modest 14x. This number alone implies Sears is overvalued by
almost 50%.
Next I looked at their growth rates…
While the industry is expected to grow over 14% a year for the next five
years… Sears trails the pack. Their projected growth rate is 40% lower
than the industry average! Again, this tells me the stock is overvalued.
However, the clincher for me was their earnings estimates trends.
Wall Street analysts who eat, breathe, and live this stock have been
slowly cutting their profit estimates. In just the last 90 days, the
group has taken a hatchet to projections… They’ve cut profit estimates
on Sears by more than 20%.
Just as a comparison, Macy’s (M) has seen their 2011 and 2012 estimates
move higher!
While positive economic news should be great for retail stocks, Sears
looks to be the odd man out. I’d stay away from this stock… I just don’t
have confidence in it.
• Auto Parts Industry (Up +14%)
Consumer confidence is improving and so are car sales. As a result, the
Auto Parts industry is also seeing business improve. Companies like
Enova Systems (ENA) and Exide (XIDE) are leading the group higher.
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