Trading Nation

Retail stocks are the ultimate value trap, except for one name, says market watcher

Trading Nation: Retail rally for real?

There's little upside for brick-and-mortar retailers despite a rally by department store stocks, says one market watcher.

"We're bearish on retail," Mark Tepper, president of Strategic Wealth Partners, told CNBC's "Trading Nation" on Tuesday. "We view retail outside of home improvement as being, at this point, a complete value trap."

Department store share prices including Macy's, Kohl's and Nordstrom rallied on Tuesday.

But Tepper points to Macy's as a prime example of a retail value trap. Its forward price-to-earnings ratio of 8.5 times is far less than S&P 500's current forward multiple of 17. That might be tempting for some investors, and shares of the department store giant have rallied 18 percent this year, but Tepper is staying away.

"They have no pricing power," Tepper said of the challenges that face one of the oldest department store chains in the U.S. "Their business is built on heavily discounting items and now they have to discount even further so that they can compete with Amazon. You add in higher fixed costs than Amazon and what you have is a really dangerous business model."

The retail sector group also looks weak on a technical basis, according to Miller Tabak equity strategist Matt Maley. The Retail XRT ETF in January climbed to its highest level since August 2015 before falling back and retreating below its 50-day moving average.

"It got right up to its 50-day moving average and has been bumping up against that. It hasn't been able to break above it. So that's a concern," said Maley.

Both agree on one exception to their bearish view on retail: Nordstrom.

"It does have a reputation for high-level service and experience that still translates with consumers and builds quite a bit of loyalty," said Tepper. "They've done quite a great job of bridging the gap between brick and mortar and online shopping."

For Maley, Nordstrom's relative underperformance in the retail sector means it could still have some energy to push higher. Its stock has made two "higher highs" that cradle a "higher low" since the beginning of the year.

Then, compare the trend line drawn from March through to August 2015 when its shares were in decline with a similar trend performance from December 2016 through to this year. Its shares are currently trading above that downward trend line.

"If it can break a little bit further above that, it will show a nice clear breakout and help, at least on a technical basis, to play catch-up with some of the names like Macy's," said Maley.

Nordstrom is up 6 percent this year, more than half the gains in Macy's shares. J.C. Penney has increased 4 percent in 2018, TJX Cos. 8 percent, Target 9 percent, and Kohl's 18 percent. The Retail XRT is flat.