Retail bears ahead of earnings

Next week marks the start of the third quarter earnings season. We look at a number of stocks which are due to report earnings that are subject to interesting investor sentiment, with focus on the Retail sector and commodity focused stocks. These include Uranium Energy Corp (AMEX:UEC), Alcoa Inc (NYSE:AA), Safeway Inc (NYSE:SWY) and Mattel Inc. (NASDAQ:MAT) in the U.S. and Asos Plc (LON:ASC) and Mothercare Plc (LON:MTC) in the UK. We also looked at institutional investment in; TJX Companies Inc (NYSE: TJX), Dollar General Corp (NYSE), Sothebys (NYSE:BID) and Williams Sonoma Inc (NYSE:WSM)

As always, Alcoa Inc’s (NYSE:AA) earnings mark the start of the reporting season but will it also set a precedent for what is predicted to be another disappointing earnings quarter? The aluminium producer’s recovery has stalled as aluminium prices have dropped faster than costs. Shorts had covered their positions over the second quarter as the share price fell, reaching a new annual short interest low of 2.8% of total shares in mid-August. However, as the share price continued to fall, shorts have returned, increasing short interest to 4.5% of the total shares. There is a convertible bond in issue which may cause convertible arbitrage.

Uranium Energy Corp (AMEX:UEC) has been busy with bolt-on acquisitions as the small cap’ stock with a market cap’ of USD 200 million continues its expansion plans. Unlike most of the major uranium miners which saw short interest increase in response to the Fukushima disaster, this stock has been historically heavily shorted. Last week, short interest peaked at 20% of total shares, but has since settled at 17% of total shares. However, institutional investors who lend have expressed positive sentiment and have steadily increasing their holdings, although two thirds of the lendable supply is out on loan.

U.S. Retailers

The U.S. Retail sector has become increasingly short evidenced by the decline in the Data Explorers Long Short Ratio. This peaked at 9 in April and has since fallen to 6.75, meaning that longs outnumber shorts by just under seven times. This increased negative sentiment is similar to levels seen a year ago and the six month decline represents the longest fall in the retail ratio for over three years.

Safeway Inc (NYSE:SWY) is due to report third quarter earnings this week. The heavily shorted stock has seen some short covering over the past two weeks to 16.5% of total shares after short interest reached a new annual high of 17.4% and the share price continues to trade close to annual lows. Taking a contrarian view, institutional investors continue to increase their holdings and now hold almost a fifth of the market cap’.

The world’s largest toy manufacturer, Mattel (NASDAQ:MAT) has seen a slight recovery in its share price ahead of earnings. Although short sellers have remained dormant towards this stock for most of this year, short interest has become increasingly bearish over the third quarter having increased by almost 350%, from insignificant levels to 3.5% of total shares. Institutional investors have also returned to investing in this stock, taking an opposite view to that of the short side of the market. A healthy 30% of the market cap’ is held by funds who lend.

Institutional investor perceptions

Based on a screen of the US retail sector:

• TJX Companies Inc (NYSE: TJX) and Dollar General Corp (NYSE) reached their 52 week high in lendable value recently

• Sothebys (NYSE:BID) and Williams Sonoma Inc (NYSE:WSM) reached a new 52 week low in lendable recently

TJX Companies is a combination of a number of discount retailers including T.J. Maxx, Marshalls & Homegoods. 2.7% of the total shares outstanding in TJX are currently on loan. Together with Dollar General, these names have outperformed over the past six months despite the increased market volatility. Discount retailers performed well following the crash of 2008 and fund managers may be turning to these “recession proof” companies to help weather a potential new economic crisis.

Sothebys is a high end retailer of fine art and collectibles. Its share price is often used as an indication of leverage in the market and can signal impending market crashes. The shares are down 40% in the last six months. Williams Sonoma is a specialty retailer with brands including Pottery Barn, West Elm, and other mid-to-high end luxury home goods. Investor sentiment is mixed, with short sellers having steadily decreased their position over the last year accompanied by a recent decrease in lendable value.

The shift away from mid-to-high end retails and towards low-end retailers amongst institutional investors who lend their shares may signal investment manager’s pessimism regarding the market and a lack of faith in the Fed’s ability to prop up the market with further quantitative easing.
 

European Retailers

In contrast to the U.S., the Long Short Ratio for the European Retail sector has increased from its annual low of 4.7 in May to 6.1.

However, UK retailers are seeing high levels of short interest, with Next (LON:NXT) topping the list of FTSE 100 companies with the greatest percentage of stock on loan at 7.1%. Second tier retailers are also heavily shorted and continue to dominate the top 10 list across the broader FTSE All Share Index. Of the stocks announcing next week, we focus on Asos and Mothercare.

Mothercare Plc (LON:MTC) will report earnings following a profits warning as consumer confidence continues to deteriorate. Short covering in the stock throughout the year has reduced short interest to 7% of total shares, as the share price tumbled to all time lows. Interestingly, institutional ownership is close to an annual high of 21% of total shares
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Although the share price of Asos Plc (LON:ASC) is in decline, the once heavily shorted stock now sees short interest at all time lows of 3% of total shares. This perhaps indicates that investors deem the share price is now a better reflection of the company’s value. Meanwhile, institutional ownership is also at low levels with total holdings of 9% of market cap’.