How you should trade the ‘Death of Retail’ today
From Nick Rokke, Analyst, Palm Beach Daily:
Retail just suffered its second-biggest bankruptcy ever…
On September 18, Toys Toys “R” Us filed for Chapter 11 bankruptcy.
The big-box toy retailer has 1,600 stores across the world. Many of them are still profitable. But the company has so much debt that it can’t pay its bills.
Toys “R” Us has piled up $5 billion in debt since a team of equity firms took it private in 2005. That’s over $3 million per store. The interest payments are suffocating the company.
Only Kmart’s $10 billion bankruptcy in 2002 was bigger.
Toys Toys “R” Us is hardly alone. There’s been a rash of retail bankruptcies this year. Just look at the chart below.
Up until last week, there was about $6 billion in total retailer debt. Toys Toys “R” Us alone added more than $5 billion to the heap.
This rush of bankruptcies has made retail one of the most hated sectors in the market. But among this hate, there are great buying opportunities.
The “Retail Apocalypse” Won’t Destroy All Retailers
In May, I told you the rise of online shopping platform Amazon was driving traditional brick-and-mortar retailers out of business.
Since the turn of the century, the e-commerce giant has been pushing traditional retailers towards extinction with its ultra-low prices.
Circuit City and Borders were some of the first victims. Mall stalwarts like JCPenney, Sears, and Macy’s may be next.
We call his phenomenon getting “Amazon’d.” Others call it the “retail apocalypse.”
No matter what you call it, weak retailers are losing money. And Amazon is exposing them.
To be honest, the U.S. probably has too many stores, malls, and shopping centers. More will fail.
Credit rating agency Moody’s recently said retailers such as J. Crew, the 99 Cents Only Stores, and Claire’s could declare bankruptcy by year’s end.
But that shouldn’t scare you away from all retailers. Some of them will continue to thrive…
Most People Still Shop at Traditional Stores
Online sales only make up 5-10% of all retail purchases in the U.S. That means physical stores still account for over 90% of all purchases.
At risk of sounding old-fashioned, there’ll always be a need for brick-and-mortar stores.
Some people still want to try on clothes before they purchase them. And not everyone wants to wait a day or two (or more) for deliveries.
That’s why brick-and-mortar store sales are still growing. A recent Kiplinger study shows expected in-store sales growth to be 1.8% this year. That’s hardly an apocalypse.
Even though the vast majority of people shop at brick-and-mortar stores… retail stocks are priced as if bankruptcy is near.
Since its peak in December 2016, the entire sector is down 20%. This fall has dragged down good companies with the bad.
However, we’re starting to see a change in retail. It appears some investors are starting to come to their senses.
The SPDR S&P Retail ETF (XRT) tracks the retail sector. In early September, it broke its downtrend.
Now that retail appears to be starting a new uptrend, it’s time to buy this undervalued sector.
The one-click way to buy retail is to buy XRT. But then you get the good companies with the bad.
If you want to own some quality individual names, check out our Elite 25 portfolio.
For those unfamiliar with the Elite 25, it consists of the most profitable and growing companies in the world. (You can learn more about the Elite 25 right here.)
Here is a list of retailers in the Elite 25 and their price-to-earnings (P/E) ratios. (The P/E ratio is how much investors are willing to pay for every dollar of current earnings.)
These companies are trading at a discount to the overall market… and to their own historical averages. And most importantly, they’re still growing.
If you’re looking for value in the market, the retail sector is a good place to start.
Nick Rokke, CFA
P.S. Retail isn’t he only sector in on the rebound. This entire market is looking bullish. And it’s just getting started.
The last time we saw a bull market like this, investors had the chance to make extraordinary gains like 1,933%… 3,636%… and 3,954%. In fact, we could see the Dow legitimately touch 60,000 or higher over the next decade. We’ve put together a free presentation showing all the details. You can watch it right here… (Plus, you’ll learn how to get a copy of my Elite 25 special report).