By Jack Hough
Apple’s stock is up 47% this year on soaring sales and profits. But investors have made much more than that–83% this year–on a trio of retailers that aren’t nearly as prosperous.
Sears Holdings (SHLD), which announced in December it would close 120 stores following weak holiday results, has made 128% for stockholders year-to-date. It’s the top performer in the S&P Composite 1500 index of large, midsize and small companies.
Office Depot (ODP), whose sales have slipped each year since 2007, has produced a 65% stock gain this year.
Hot Topic (HOTT), which sells pop-culture clothing for teens, has rung up a 56% stock gain this year–while taking in well less in sales than it did two years ago, when the Twilight vampire movies were hot.
A rising stock price is sometimes an early clue that a struggling company is turning things around. But in these cases, investors should use caution before buying shares.
That’s because the rally in these and similar stocks stems from a sudden shift in investor sentiment, not from signs of lasting improvement at the companies themselves. Six months ago, Europe was flirting with a monetary collapse, China’s economy seemed at risk for a jarring slowdown and the U.S. recovery looked shaky. Investors were piling into low-yield Treasury bonds and other safe haven investments.
Today, the Euro zone is weak but intact, China’s growth is slower but not slow and the U.S. recovery looks more convincing, with falling jobless claims, strong exports and a shrinking inventory of houses for sale. Treasury prices have fallen of late and stocks have surged. If weaker companies have posted the best returns, it’s because they were priced for the worst, and the worst didn’t come–not because they’re suddenly thriving.
Sears and Office Depot are at cutting costs, but the former is struggling to compete with Wal-Mart (WMT) and Target (TGT) and the latter, with Office Max (OMX) and Staples (SPLS). Hot Topic looks likely to cash in on the box office success of Hunger Games, but it doesn’t have exclusive rights to the merchandise.
These stocks aren’t particularly expensive. In fact, each trades at a discount to the broad market relative to company sales. But such discounts are common among companies with limited profit power. Office Depot and Hott Topic over the past year have turned less than a penny per sales dollar into operating profit, versus industry averages of a nickel and seven cents, respectively. Sears hasn’t produced an operating profit.
That doesn’t leave a lot of room for things to go wrong, and the current rally among weak operators won’t last forever.