Is Sears a Risky Investment?

With shares of Sears (NASDAQ:SHLD) trading around $43, is SHLD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Sears operates as a specialty retailer in the United States and Canada. The company’s Kmart segment operates stores that sell merchandise under Jaclyn Smith and Joe Boxer labels, as well asSears brand products such as Kenmore, Craftsman, and DieHard. This segment’s stores provide consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; they also operate in-store pharmacies. The company’s Sears Domestic segment operates stores that sell merchandise under the Kenmore, Craftsman, DieHard, Lands’ End, Covington, Apostrophe, and Canyon River Blues brand names. Its stores provide appliances, consumer electronics, tools, sporting goods, lawn and garden equipment, home fashion products, apparel, footwear, jewelry, accessories, health and beauty products, pantry goods, household products, and toys, as well as automotive services and products.

Former Sears executive Steven Dennis says now is the time for the struggling retailer to liquidate. In a commentary on his blog last week, Dennis, a former vice president at Sears who exited the company in 2003 after about a decade, listed five reasons why the company should “stop the charade and embrace the inevitable.”

T = Technicals on the Stock Chart Are Mixed

Sears stock has not made significant progress in several years. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Sears is trading between its rising key averages, which signals neutral price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Sears options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Sears options

89.71%

80%

78%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Average

Average

July Options

Average

Average

As of Tuesday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Sears’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Sears look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-27.02%

-4.73%

-19.85%

-17.97%

Revenue Growth (Y-O-Y)

-13.62%

-6.6%

-6.30%

-8.82%

Earnings Reaction

6.46%

-2.86%

-8.2%

-13.61%

Sears has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Sears’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Sears stock done relative to its peers – Kohl’s (NYSE:KSS), J.C. Penney (NYSE:JCP), and Macy’s (NYSE:M) — and sector?

Sears

Kohl’s

J.C. Penney

Macy’s

Sector

Year-to-Date Return

9.2%

-1.97%

0.87%

7.47%

4.89%

Sears has been a relative performance leader, year-to-date.

Conclusion

Sears operates as a specialty retailer in the United States and Canada. Former Sears executive Steven Dennis says now is the time for the struggling retailer to liquidate. The stock has not made significant progress in several years but is currently moving higher. Earnings and revenue figures have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Sears has been a performance leader year-to-date. WAIT AND SEE what Sears does the rest of this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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