Trimming This Retail Position as the Sector Diverges
With retail stocks slipping as earnings approach, we’re reducing our position.
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We’re into the dog days of August. The days are getting shorter and the kids are going back to school.
Earnings season is also winding down, and it’s been a strong one. With results in for over 90% of the S&P 500, earnings for about 85% of companies reporting came in ahead of analysts’ expectations.
Now the retail portion of earnings season is heating up. This week, we’ll hear from Walmart (WMT), Target (TGT), TJX Brands (TJX) and a host of other retailers.
Bellwether Blues
I’m concerned about the recent behavior of a retail bellwether, the State Street Retail SPDR (XRT). This ETF closed at a multi-year high earlier this month (point A). Now, just two weeks later, XRT has closed below its 50-day moving average (blue).
Since reaching a four-year high on August 4, XRT has fallen by over 5%. Over that same period, the S&P 500 has gained about 1.5%.
This disparity is concerning because it comes just as some of retail’s biggest names are scheduled to report earnings. If institutional investors are lightening up on retail stocks ahead of earnings, should we consider doing the same?
Right on Target
Six months ago, we bought shares of Target for the first time (point A). At the time, the Minnesota-based retail chain was breaking out after earnings crushed Wall Street’s estimates.
We wrote that Target shares had room to run, and that’s exactly what they did. Six months later, our Target position has gained 26%. That might not sound impressive, but it’s an outstanding six-month return for a retail stock, as this sector tends to be less volatile than tech.
Target Earnings on Wednesday
Target is scheduled to report earnings on Wednesday, August 19 before the opening bell. Before that report hits the newswire, I’m going to close half of my position in the stock.
Why not close the entire position? By locking in a gain on half of the position, I’m allowing for further potential upside. After all, Target still has strong momentum. Just last week, the stock closed at a 52-week high.
At the same time, by closing half of the position with a 26% profit, the negative impact of a post-earnings downturn would be blunted. It’s a win-win scenario.
Bottom Line
Institutional investors don’t enter and exit positions all at once. Retail traders should consider how using that approach could work to their advantage.
At the time of publication, Ponsi was long TGT and WMT.
