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Industry Rank Analysis 10-26-11
Before you know it, Christmas will be here. That is something that tends to bring retail front and center to the minds of investors. Rumors of the death of the U.S. consumer appear to be premature.
Despite extremely low levels in the surveys of consumer confidence, people are still going out to shop. Personally I don’t like to rely on those surveys, because what people say to the poll takers is often very different from what they actually do. A wide variety of retail industries are doing very well based on the Zacks Rank.
Zacks Industry Classifications
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one- or two-firm industry to the top (or bottom) of the charts.
It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the industry.
A Cornucopia of Retailers
There are six different retail “industries” clustered in the top 15. Some of them are on the small side, with two of them having just four members, but they are still larger (by number of firms) than five other members of the top 15.
One, the Miscellaneous/Diversified Retailers, is actually far larger than average, with 29 firms in it. Not surprisingly it is the “weakest” of the six coming in a three way tie for 14th place, but given the size of the group perhaps it has the most impressive showing. Its average Zacks Rank is 2.38, unchanged from last week.
The Drug Store Industry is the next biggest, with 11 members, and also the next furthest down the list coming in 13th place, but that is an improvement of 13 spots from last week. Its average Zacks Rank fell to 2.36 from 2.55 last week.
The two “industries” with four members are in a tie for eighth place, both slipping one spot on the week with unchanged average ranks of 2.25. Despite the similarities in rank, they are very different types of stores: Jewelry and Convenience.
Doing slightly better are the Regional Department Stores, a five-member industry in seventh place on an unchanged average Zacks Rank of 2.20. Best of all is the Auto Parts stores, in a six way tie for first place (an improvement of 8 spots) with an average rank of 2.00. With six members it is a slightly below-average-sized industry.
If the Zacks Ranks were distributed randomly, one would expect that only 5% of the members of these “industries” would earn the coveted Zacks #1 Rank (Strong Buy). Instead, 14 of the total of 39 (35.9%) have earned that distinction. If it were random, only 15% would hold Zacks #2 Ranks (Buy) but actually 16, or 41.0%, hold it.
In terms of target shoppers, the firms range from those that cater to the very wealthy, such as the high-end department store chain Saks (SKS - Analyst Report) to those that cater to a decidedly less affluent clientele such as drug store giant CVS (CVS - Analyst Report).
While CVS is the only mega-cap firm on either table, there are four other firms that top $10 billion in market capitalization. Most, however, are mid- to small-cap firms and even two sub-$100 million micro caps to chose from. The valuations are, for the most part what I would call reasonable -- not compelling, but not at scary nose-bleed levels either.
A Couple Caveats
There are a few that I would be cautious about on a valuation basis, particularly on this year's earnings. Also, while things are going well now -- or at least much better than people had been anticipating (and the Zacks Rank is driven by the change in expectations and earnings surprises) -- I do remain worried about consumer spending in 2012.
Unless Congress does something, the payroll tax cut that has been in effect for this year will expire on January 1st. For someone earning $50,000, that means $1,000 less in take-home pay, and that will probably result in a lot less discretionary spending. That will be a very big issue for the Retailers that either mostly cater to the middle to lower class customer, or which sell very discretionary items.
Since the tax increase will max out at $2,134 (2% of the $106,700 limit on payroll tax collections) that will be much less of an issue for a firm like Tiffany’s (TIF - Analyst Report). One should, however, not make the mistake of thinking that a weak economy is bad for all retailers. For example, if people are not confident enough to buy a new car, it means they will be keeping their old jalopy on the road longer. That can only be good news for the auto parts Stores like O’Reilly (ORLY - Analyst Report) and Advance Auto (AAP - Analyst Report).
The Zacks Rank is, however, better used as a short term timing/trading tool, not as a guide towards long-term investing. Its maximum impact comes in less than three months. Thus even if you agree that there will be substantial headwinds for the consumer next year, there may still be a good trade or two to be made.
Number 1 Ranked Firms
Before you know it, Christmas will be here. That is something that tends to bring retail front and center to the minds of investors. Rumors of the death of the U.S. consumer appear to be premature.
Despite extremely low levels in the surveys of consumer confidence, people are still going out to shop. Personally I don’t like to rely on those surveys, because what people say to the poll takers is often very different from what they actually do. A wide variety of retail industries are doing very well based on the Zacks Rank.
Zacks Industry Classifications
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one- or two-firm industry to the top (or bottom) of the charts.
It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. The definition of size that matters here is not the total sales or market capitalization but the number of companies in the industry.
A Cornucopia of Retailers
There are six different retail “industries” clustered in the top 15. Some of them are on the small side, with two of them having just four members, but they are still larger (by number of firms) than five other members of the top 15.
One, the Miscellaneous/Diversified Retailers, is actually far larger than average, with 29 firms in it. Not surprisingly it is the “weakest” of the six coming in a three way tie for 14th place, but given the size of the group perhaps it has the most impressive showing. Its average Zacks Rank is 2.38, unchanged from last week.
The Drug Store Industry is the next biggest, with 11 members, and also the next furthest down the list coming in 13th place, but that is an improvement of 13 spots from last week. Its average Zacks Rank fell to 2.36 from 2.55 last week.
The two “industries” with four members are in a tie for eighth place, both slipping one spot on the week with unchanged average ranks of 2.25. Despite the similarities in rank, they are very different types of stores: Jewelry and Convenience.
Doing slightly better are the Regional Department Stores, a five-member industry in seventh place on an unchanged average Zacks Rank of 2.20. Best of all is the Auto Parts stores, in a six way tie for first place (an improvement of 8 spots) with an average rank of 2.00. With six members it is a slightly below-average-sized industry.
If the Zacks Ranks were distributed randomly, one would expect that only 5% of the members of these “industries” would earn the coveted Zacks #1 Rank (Strong Buy). Instead, 14 of the total of 39 (35.9%) have earned that distinction. If it were random, only 15% would hold Zacks #2 Ranks (Buy) but actually 16, or 41.0%, hold it.
In terms of target shoppers, the firms range from those that cater to the very wealthy, such as the high-end department store chain Saks (SKS - Analyst Report) to those that cater to a decidedly less affluent clientele such as drug store giant CVS (CVS - Analyst Report).
While CVS is the only mega-cap firm on either table, there are four other firms that top $10 billion in market capitalization. Most, however, are mid- to small-cap firms and even two sub-$100 million micro caps to chose from. The valuations are, for the most part what I would call reasonable -- not compelling, but not at scary nose-bleed levels either.
A Couple Caveats
There are a few that I would be cautious about on a valuation basis, particularly on this year's earnings. Also, while things are going well now -- or at least much better than people had been anticipating (and the Zacks Rank is driven by the change in expectations and earnings surprises) -- I do remain worried about consumer spending in 2012.
Unless Congress does something, the payroll tax cut that has been in effect for this year will expire on January 1st. For someone earning $50,000, that means $1,000 less in take-home pay, and that will probably result in a lot less discretionary spending. That will be a very big issue for the Retailers that either mostly cater to the middle to lower class customer, or which sell very discretionary items.
Since the tax increase will max out at $2,134 (2% of the $106,700 limit on payroll tax collections) that will be much less of an issue for a firm like Tiffany’s (TIF - Analyst Report). One should, however, not make the mistake of thinking that a weak economy is bad for all retailers. For example, if people are not confident enough to buy a new car, it means they will be keeping their old jalopy on the road longer. That can only be good news for the auto parts Stores like O’Reilly (ORLY - Analyst Report) and Advance Auto (AAP - Analyst Report).
The Zacks Rank is, however, better used as a short term timing/trading tool, not as a guide towards long-term investing. Its maximum impact comes in less than three months. Thus even if you agree that there will be substantial headwinds for the consumer next year, there may still be a good trade or two to be made.
Number 1 Ranked Firms
| Company | Ticker | Market Cap ($ mil) | P/E Using Curr FY Est | P/E Using Next FY Est | %Ch Curr Fiscal Yr Est - 4 wks | %Ch Next Fiscal Yr Est - 4 wks | Current Price |
| Bed Bath&Beyond | BBBY | $13,186 | 14.38 | 12.56 | 0.18% | 0.23% | $52.90 |
| Macys Inc | M | $11,326 | 10.43 | 9.14 | 1.97% | 2.62% | $26.54 |
| O Reilly Auto | ORLY | $8,045 | 16.19 | 14.27 | 0.61% | 0.76% | $58.35 |
| Petsmart Inc | PETM | $4,624 | 16.76 | 14.51 | 0.22% | 0.34% | $40.78 |
| Tractor Supply | TSCO | $4,255 | 20.83 | 18.12 | 2.41% | 1.94% | $58.89 |
| Advance Auto Pt | AAP | $4,057 | 11.42 | 10.1 | -0.37% | -0.05% | $52.94 |
| Dicks Sprtg Gds | DKS | $3,903 | 16.71 | 14.35 | 0.04% | -0.21% | $32.49 |
| Ulta Salon Cosm | ULTA | $3,451 | 34.59 | 27.63 | 0.18% | 0.62% | $56.39 |
| Chicos Fas Inc | CHS | $2,320 | 14.97 | 12.65 | 0.06% | -0.31% | $13.17 |
| Saks Inc | SKS | $1,537 | 28.01 | 19.38 | 1.68% | 2.92% | $9.40 |
| Steiner Leisure | STNR | $681 | 13.19 | 11.97 | -0.15% | 0.73% | $45.29 |
| Pharmerica Corp | PMC | $362 | 14.48 | 13.11 | 2.22% | 0.00% | $12.34 |
| Susser Hldgs Cp | SUSS | $282 | 15.63 | 14.55 | 3.28% | 3.18% | $16.19 |
| Marinemax Inc | HZO | $180 | N/A | 43.76 | -9.30% | 12.77% | $7.73 |
Number 2 Ranked Stocks
| Company | Ticker | Market Cap ($ mil) | P/E Using Curr FY Est | P/E Using Next FY Est | %Ch Curr Fiscal Yr Est - 4 wks | %Ch Next Fiscal Yr Est - 4 wks | Current Price |
| Cvs Caremark Cp | CVS | $46,305 | 12.31 | 10.77 | -0.22% | 0.25% | $34.15 |
| Cardinal Health | CAH | $14,069 | 13.15 | 11.69 | 0.95% | 1.36% | $40.13 |
| Autozone Inc | AZO | $11,585 | 14.54 | 12.64 | 0.00% | 0.14% | $278.74 |
| Tiffany & Co | TIF | $8,830 | 19.4 | 16.75 | 0.41% | 0.50% | $69.14 |
| Signet Grp Plc | SIG | $3,061 | 10.56 | 9.35 | 0.00% | 0.00% | $35.42 |
| Dillards Inc-A | DDS | $2,846 | 13.73 | 11.8 | 2.42% | 3.74% | $52.39 |
| Kar Auction Svc | KAR | $2,258 | 14.98 | 14.54 | 0.00% | 0.00% | $16.58 |
| Rite Aid Corp | RAD | $1,068 | N/A | N/A | 5.49% | 0.73% | $1.20 |
| Bioscrip Inc | BIOS | $326 | 22.26 | 12.52 | 0.00% | 0.00% | $6.01 |
| China Nepstar | NPD | $268 | 32.5 | 32.5 | 3.23% | 3.23% | $2.60 |
| Us Auto Parts | PRTS | $216 | 247.1 | 28.1 | 0.00% | 0.00% | $7.06 |
| Cost Plus Inc | CPWM | $162 | 11.93 | 7.7 | 0.00% | 0.00% | $7.28 |
| Zale Corp New | ZLC | $147 | N/A | N/A | 0.00% | N/A | $4.58 |
| Build-A-Bear Wk | BBW | $109 | N/A | 25.66 | -55.56% | 0.00% | $5.56 |
| Travelcenters | TA | $83 | 14.9 | 5.78 | 0.00% | 0.00% | $4.62 |
| Us Home Sys Inc | USHS | $36 | 9.52 | 7.17 | 0.00% | 0.00% | $4.95 |
In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.
The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.
Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.
The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.
Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
Read the full analyst report on CVS
Read the full analyst report on SKS
Read the full analyst report on TIF
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