The past year has proven to be challenging for retailers. Between consumers clenching their purse strings and inflationary margin squeezes, retail companies saw only marginal growth last year. But that could be ready to change. …
A lot of eyes are on retail right now. As a sector, retail sales make up more than 7% of the country’s GDP, and serve as one of the best predictors of what GDP numbers might look like. Right now, they’re looking up. The National Retail Federation estimates that retail sales will increase by 3.4% in 2012, a hike that comes despite challenging unemployment and macroeconomic environments.
With that rising retail tide comes a big opportunity for investors. I’m talking about short squeezes in bet-against retail stocks.
Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.
Without further ado, here’s a look at our list of retail short-squeeze opportunities for 2012.
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J.C. Penney
Founded 110 years ago, department store giant J.C. Penney JCP sports more than 1,106 stores spread throughout 49 states and Puerto Rico. Its size and history have made this firm one of the best-known retail names in the country, brand recognition that should keep some level of shoppers flowing through its shopping-mall anchor stores. Still, short sellers are entrenched in this stock; a short interest ratio of 12.4 means that it would take nearly three weeks of buying for sellers to cover their positions at current volume levels.
J.C. Penney has been joining most of its peers in refreshing its merchandising strategy, a plan that the company expects to deliver palpable increases in comparable sales in the next couple of years. One of the biggest shake ups, though, comes from Penney’s management -- new CEO Ron Johnson hails from Apple AAPL, where he was an architect of the firm’s wildly successful retail strategy. Before that, Johnson was vice president of merchandising for Target TGT. That pedigree counts for quite a bit as investors look toward Penney’s future.
In the meantime, free cash flow generation abilities and a reasonably strong balance sheet should keep the firm in solid enough financial shape to make changes and support its 2.4% dividend yield. An analyst day later this month could be an upside catalyst for shares.
GameStop
Last year was a strong one for video game retailer GameStop GME. Within 12 months, shares have rallied more than 14%, while the broad market has essentially stayed flat. But that performance is bringing on some negative attention from short sellers. Right now, a short-interest ratio of 24 suggests that it would take nearly five weeks of buying pressure for shorts to exit their positions at current volume levels.
GameStop operates more than 6,600 stores worldwide, making it the world’s largest video game retailer. That’s a big part of the heavy shorting in this stock -- with competitors like Best Buy BBY out for blood, GME has a big target on its back. GameStop continues to perform at a high level, despite attempts to step in on its business. New initiatives in its online and digital business should help to stave off competition that’s sprouting up from game developers who want to cut out the middle man and collect retail prices themselves. A large customer base should make GameStop’s services popular alternatives for gamers.
The firm announced better-than-expected numbers for 2011 holiday sales, largely thanks to its narrow niche. Wth a massive used game catalog making up the lion’s share of GameStop’s sales, cost-conscious consumers are more likely to buy at GameStop than a big box store. The introduction of used games at Best Buy hasn’t changed that yet.
AutoNation
As the largest car retailer in the country, AutoNation AN is no stranger to short-selling. During the height of the financial crisis, with consumer credit seized up and big-ticket purchases essentially on hold, dealers closed their doors en masse, making a bet against the industry a fairly good one. That has changed. Today AutoNation operates in what amounts to a bull market for car buying – all with dramatically less competition than it faced before so many peers were shaken out.
The company owns 213 dealerships in 15 states, generating nearly $12 billion in revenues in its most recent fiscal year. While sales are still down considerably from their pre-recession highs, they’ve definitively turned the corner from the lows they hit in fiscal 2009. Year-end numbers on Jan. 24 could shake out some shorting in this stock.
AutoNation benefits from economies of scale that its competitors can’t touch. The company has better negotiating power with car makers and parts suppliers, and it’s able to fulfill financial services roles in-house, yielding bigger margins. New cars still contribute the majority of AN’s sales, but a push toward more service-driven revenue streams should help to diversify that revenue toward sales that are less sensitive to interest rates. AutoNation’s short-interest ratio currently sits at 11.42.
Groupon
A lot of attention has been on Groupon GRPN since the firm’s initial public offering in early November. Since going public on the Nasdaq, shares have slid more than 25%. Groupon hit the market during the tail end of a social-media stock frenzy, as backers attempted to make an exit from their shares at favorable prices. While that frenzy has died down somewhat, there’s still potential for a snapback in Groupon.
As one of the biggest “daily deal” sites on the Internet, Groupon’s business involves connecting consumers with retailers who are looking to acquire customers. While the firm’s growth has been breakneck, Groupon’s profitability hasn’t. That’s left shareholders holding a stock with an extremely lofty valuation in a less-than-appealing equity market. Even if fundamentals aren’t as strong as other heavily shorted retail names on this list, Groupon’s low float makes shorting an expensive proposition; any better-then-expected numbers could squeeze short sellers out of this name temporarily.
At last count, Groupon’s short-interest ratio stood at 12.25, suggesting that it would take nearly three weeks for shorts to exit their positions at current volume levels. To take advantage of a short squeeze in Groupon, it’s best to think of any squeeze as a trading opportunity, not an investment.
Fastenal
Fastenal’s FAST retail presence is one of its most important attributes; this industrial supplier has more than 2,400 worldwide locations through which it sells its massive catalog of fasteners, maintenance supplies and repair items. Despite its large geographic footprint, Fastenal benefits from the hugely fragmented nature of its industry. Even though Fastenal is one of the largest names in the industrial distributor market, it controls a tiny fraction of total market share. This leaves ample room for sales growth.
Because of its positioning, selling products to industrial firms, Fastenal has been a perennial short target since the height of the financial crisis. Even so, sellers’ investment thesis hasn’t played out – and hefty net margins and a bulletproof balance sheet mean that the company is unlikely to face financial duress in the near term.
A short-interest ratio of 13.74 makes Fastenal a solid candidate for a short squeeze, however. While this morning’s quarterly earnings numbers were in-line with analysts’ expectations, a number of other catalysts could spur short-covering in the next six months.
To see this week’s short squeezes in action, check out the Retail Short Squeezes portfolio on Stockpickr.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.
