Can Sears Stock Rebound?

With shares of Sears (NASDAQ:SHLD) trading around $36, 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; and Sears 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; and 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, outdoor living, 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.

Sears forecast a fourth-quarter loss and reported declining sales during the crucial holiday period. The retailer said it expects a net loss of between $250 million and $360 million for the fourth quarter of fiscal 2014, compared to a net loss of $460 million a year earlier. Same-store sales dropped 5.7 percent in the quarter through Jan. 6 at Kmart, and 9.2 percent at U.S. Sears stores , resulting in a for a company-wide decline of 7.4 percent. Both brands reported weaker consumer electronic sales, while Sears domestic stores’ also reported lower tools and home appliance sales, while Kmart was stung by falling demand for grocery, household products and toys. In a blog post, CEO Eddie Lampert said the results “are not nearly what we want them to be.” He added that, “They also overshadow all of the work that’s being done by our associates, our vendors and the other businesses we work with, along with everyone who is developing better ways for us to serve our members.”

T = Technicals on the Stock Chart Are Weak

Sears stock has not made significant progress in several years. The stock is currently seeing lower lows as it continues to pull back. 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 above its rising key averages, which signal neutral to bearish price action in the near-term.

SHLD

(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

63.18%

16%

13%

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

Put IV Skew

Call IV Skew

February Options

Steep

Average

March Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-4.73%

-19.85%

-17.97%

-0.43%

Revenue Growth (Y-O-Y)

-6.60%

-6.30%

-8.82%

-1.76%

Earnings Reaction

-2.86%

-8.20%

-13.61%

-5.20%

Sears has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been displeased with Sears’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

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

Sears

Kohl’s

J.C. Penney

Macy’s

Sector

Year-to-Date Return

-25.20%

-0.92%

-19.20%

4.18%

-11.28%

Sears has been a poor relative performer, year-to-date.

Conclusion

Sears operates as a specialty retailer in the United States and Canada. The company forecast a fourth-quarter loss and reported declining sales during the crucial holiday period. The stock has not made significant progress in several years and is currently seeing lower lows. Earnings and revenue figures have been decreasing, so investors have been displeased with recent earnings announcements. Relative to its peers and sector, Sears has been a poor performer year-to-date. STAY AWAY from Sears for now.

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