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Home Depot, Sears: Setting Trend For Retail Stocks?

Home Depot
Home Depot

It has been a tough time to be short retail stocks, even with same store sales likely to be even weaker than expected. Today though the short call is working and many of those short sellers may be willing to step back from the ledge given word from Home Depot and Sears that their earnings will disappoint. That word is countering the positive force of the rumor mill of retail buyouts that have buoyed stock prices despite slumping sales.

Every week it seems that we're hearing of yet another potential deal. Macys , Target and Jones Apparel are just some of the companies whose stock prices have been boosted by rumors of buyouts, sales and spin-offs. Investors seem to not know whether to look at retailers' margins and sales or to focus on retail companies as items for sale themselves.

Macy's has been posting disappointing same store sales numbers on a monthly basis since the integration of the May and Federated Department stores was completed this spring. Yet shares have been trading up in past weeks on rumors of a potential private equity buyout of the department store giant. Over the past week, shares of discounter Target were also up on the rumor that the company may be spinning off its credit card business. At one point, one short-selling hedgier told me that he thought there was a $7 premium priced into Target shares all due to rumors (without news to substantiate whispers) that the company was being pressured by activist investor Bill Ackman of Pershing Square to spin-off its credit card division.

While most analysts I spoke with scratched their head at the suggestion that a spin-off would add substantial value to TGT shares, Target shares did move on this otherwise unlikely idea.

Citi analyst Deb Weinswig released a note saying that at best, "a divestiture of TGT's credit card business could reduce perceived risk in the stock and possibly expand the P/E multiple (given that the credit business is a lower multiple business)." BUT Weinswig went on to say that Citi doubts TGT management would sell the credit card business as it helps fuel growth of core retail operations AND she said it would be difficult for an activist shareholder like Ackman to push a sale of the credit card business.

While anything seems possible in a market where cash is cheap and burning a hole in the pockets of private equity firms eager to snatch up brands or companies or company divisions, most of the people that I speak with very much doubt a spin-off of Target's credit card division. One hedge went so far as to recall Ackman's past problems with the SEC and suggested that Ackman was taking a Target stake and spinning a story via leaking rumors in order to talk up the stock price. I called Ackman to ask him to respond to these harsh accusations. He has not returned my phone call. Perhaps he'll respond to this blog.

What's the source of the Macy's buyout rumors? Unclear. I asked Macy's CEO Terry Lundgren back in March whether he would consider selling the department store giant and just whether he had heard from activist Carl Icahn. Lundgren ruled out any possibilities of a sale or spin-off at that time. Investor Jeff Macke (i.e. Fast Money's "Lone Wolf") was only one of the voices skeptical that a buyout of Macy's before Lundgren is finishined constructing the underlying business would be a smart investment by any p.e. firm.

No one will go out on a limb and completely rule it out though, because these days it seems absolutely everything is up for sale. Here's the other tricky thing: the rumors have lifespan. For months, we heard about Dubai's Istithmar buying out Barneys from Jones Apparel. When we finally thought that the rumor was confirmed and Jones announced the $ 800+ million buyout, Japan's Fast Retailer swooped in with a counter offer. All we can do is just wait and see.

Tell me what you think about these buyout--and just what businesses you think will be up for sale. Email me to place your bets: retaildetail@cnbc.com.

Questions? Comments? retaildetail@cnbc.com