Retail Stock Crash
This past week, two dominant market trends were the crypto crash and the retail stock crash. The crypto crash was far more severe than the retail stock crash and arguably exposed some traders to risks they did not expect. Along these lines, the crypto crash reminded me of the dot-com crash and sub-prime mortgage crises, and the parallels make it a worthwhile topic. Next, the crypto crash likely caused secondary effects on the stock market as investors moved money to cover losses.
However, the retail stock crash impact on stock market investors is far more severe for dividend growth investors. The drop in stock prices started with Walmart (WMT) but accelerated with abysmal results from Target (TGT).
Specifics on the Crypto Crash
Luna and the algorithmic stable coin TerraUSD collapsed, wiping out billions. However, the challenges in the crypto market also extend to the stable coin, UST, that deviated from its peg and collapsed. Other cryptocurrencies have declined too. Overall, the crypto crash wiped out more than $2 trillion in value, or roughly two-thirds of the total market value.
That being said, investors or traders that specific cryptocurrencies early enough are still sitting on massive paper gains.
However, the crypto crash is exposing weakness in the underlying basis for some cryptocurrencies. Stable coins not backed by actual dollar reserves may not be stable, after all. A recent report describes the inherent fragility of algorithmic stable coins.
The chart below shows the value of some cryptocurrencies from about November 2021 to May 20th, 2022.
|Cryptocurrency||Ticker||November 1st, 2021||May 20th, 2022|
Clearly, this kind of volatility limits crypto’s use as a store of value, a common argument, unlike gold that has held its value. For example, gold’s spot price was $1,794 on November 1st, and it was $1,834 on May 20th.
Specifics on Retail Stock Crash
The retail crash arguably started when Walmart reported higher sales, but lower margins affected earnings. In addition, the company is struggling with higher labor and logistics costs. Investors responded by selling Walmart stock. The stock price fell from about $148 to $135 and fell further when Target reported earnings on May 18th.
Target reported poor results and missing top and bottom-line estimates. The stock price fell from $215.28 to $160.55 in response and has trended down since then. Despite higher sales, operating income fell off a cliff to $1.3 billion from $2.4 billion because gross margins declined during the quarter. Gross margins fell to 25.7% from 30.0% in comparable periods due to higher markdown rates, freight costs, supply chain disruptions, and higher labor costs. Target’s CEO stated,
Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time.
The damage was widespread as the Dow 30 fell 1,200 points and the Nasdaq and S&P 500 Index both declined 4%+. The carnage in retail stocks was even worse because investors thought Walmart’s poor results were a one-off but realized the problem was more widespread.
The chart below shows the decline in prices from May 17th to May 20th. Besides these retailers, many others and retail ETFs experienced a price decline.
|Company||Ticker||May 17th||May 20th|
|Abercrombie & Fitch||ANF||$33.36||$27.91|
The chart below is from Stock Rover*.
What to Do Now?
Investors long retail stocks were punished. Even favorites like Costco struggled (long COST). However, demand is now declining after a tailwind from the pandemic. As a result, stock prices are adjusting downward for lower future expectations.
In addition, investors should expect continued volatility in response to the US Federal Reserve’s tightening. Their stated goal is full employment and low inflation. The US has an unemployment rate of 3.6% but is near a 40-year high for inflation. Therefore, investors should expect another 0.50% rate increase in June.
However, as a buy-and-hold dividend growth investor, I am staying the course. Market corrections and bear markets are a normal part of investing. As John Bogle said,
If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.
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The Stock of the Week
Today we highlight Best Buy (BBY), the electronic retailer giant. We highlight the company since, according to Stock Rover*, the stock price was down nearly (-35%) in the trailing 1-year. Best Buy is a Dividend Contender with 19 years of dividend increases. The dividend yield went up to about 4.9%, the highest since January 2013. The payout ratio is very conservative at about 29%. The stock is below the 50-day and 200-day exponential moving average (EMA). The forward P/E ratio is roughly 8.2X below its 5-year and 10-year range. Stock Rover* states most analysts rate the Best Buy a buy or hold with a consensus target price of $115.17.
Dividend Increases and Reinstatements
Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.
Dividend Cuts and Suspensions List
The dividend cuts and suspensions list was most recently updated at the end of April 2022. As a result, the number of companies on the list has risen to 551. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.
Three new additions indicate companies are experiencing solid profits and cash flow in April.
The new additions were Gouverneur Bancorp (GOVB), Bridge Investment Group (BRDG), and Western Asset Management (WMC).
Dow Jones Industrial Averages (DJIA): 31,261 (-2.91%)
NASDAQ: 11,355 (-3.82%)
S&P 500: 3,901 (-3.04%)
The S&P 500 is trading at a price-to-earnings ratio of 19.72X, and the Schiller P/E Ratio is about 30.71X. These multiples are based on trailing twelve months (TTM) earnings.
Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively.
The market is still overvalued despite the recent market correction and rebound. Earnings multiples more than 30X are overvalued based on historical data.
S&P 500 PE Ratio History
Shiller PE Ratio History
Stock Market Volatility – CBOE VIX
This past week, the CBOE VIX measuring volatility was down about 0.5 points to 29.43. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.
The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.
Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.
The Commerce Department reported advance US retail and food services sales increased 0.9% to $677.7B in April; this follows an upwardly revised 1.4% increase for March. Retail sales are up 8.2% year over year, beating March’s 7.3% reading; much of the growth is due to higher prices. This is the fourth consecutive month of increase in retail sales. Total sales for February 2022 through April 2022 were up 10.8% year over year. Much of the rise in April retail sales was attributable to spending on autos and parts (+2.2%) and dining (+2.2%). Offsetting the increase was a 2.7% drop in gasoline sales. Excluding gasoline, retail sales increased 1.3% in April. Miscellaneous stores (+4.0%), nonstore retailers (+2.1%), and electronics & appliances (+1.0%) all saw increases, while spending on sporting goods, books and hobbies (-0.5%), food and beverage stores (-0.2%), and homer centers (-0.1%) saw declines.
The US Energy Information Administration reported that US commercial crude oil stockpiles decreased by 3.4M barrels to 420.8M barrels (14% below the five-year average) for the week ending May 13th. Crude oil refinery inputs averaged 15.9M barrels per day, a decrease of 239K barrels per day compared to the previous week’s average. Gasoline inventories decreased by 4.8M barrels (8% below the five-year average), and distillate inventories increased by 1.2M barrels (22% below the five-year average). Refineries operated at 91.8% of their operable capacity as gasoline production increased, averaging 9.5M barrels per day. Crude oil imports came in at 6.6M barrels per day, an increase of 299K barrels per day compared to the previous week.
The National Association of Realtors reported that sales of existing homes fell 2.4% in April to a seasonally-adjusted annual rate of 5.61M, down 5.9% compared to April 2021. Home sales have now dropped for three consecutive months. Sales of single-family homes fell to an annual rate of 5.12M (-4.8% Y/Y), while existing condo sales dropped to a 620K annual rate (-13.9% Y/Y). Total housing inventory was reported at 1.03M, up 10.8% over March’s inventory (-10.4% Y/Y). Properties typically remained on the market for 17 days, the same reading as both March 2022 and April 2021. Eighty-eight percent of the homes sold in April 2022 were on the market for less than a month. The median sales price increased to $391,200 (+14.8% Y/Y).
Thanks for reading Retail Stock Crash – Week in Review!
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.