Can Sears Surge Higher?

With shares of Sears (NASDAQ:SHLD) trading around $44, 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.

When someone says “the future of retail,” is “Sears” the first word that comes into your mind, swiftly followed by “Kmart”? If not, perhaps you need to re-educate yourself, starting with the annual shareholder letter from Sears chief Eddie Lampert. “Not only do I believe that we are headed in the right direction in important ways,” he says in the letter, released today, “I believe the entire retail industry is headed to where we already are.” That might not be the image many have of the company, whose stores have attracted attention over the last year for the grim state of their merchandising, the closure of the famed Sears portrait studios, and their troubled attempt at equipping sales staff with iPads. But according to Mr. Lampert, those critiques are missing the point: the company is becoming an “integrated retail” powerhouse merging online sales with brick-and-mortar stores.

More importantly, many of the changes that other retailers are making to survive today follow innovations that were either pioneered or significantly advanced in Sears and Kmart locations, like converting physical stores to be able to fulfill online orders and emphasizing ship-to-store and ship-from-store programs. These are areas where much of our investment has been focused over the years, despite the widespread and, we believe, incorrect belief among many outside commentators that what our stores need most are hundreds of millions of dollars more in décor and fixtures. We believe that the developments in the entire retail industry validate our decisions to shift much of our investment instead to digital and integrated retail.

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 set 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 signal neutral 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

69.03%

16%

14%

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

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal 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%

-6.60%

-6.30%

-8.82%

Earnings Reaction

6.46%

-2.86%

-8.20%

-13.61%

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

P = Average 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

-9.12%

-0.78%

-19.70%

8.43%

-4.29%

Sears has been an average performer, year-to-date.

Conclusion

Sears operates as a specialty retailer in the United States and Canada. The stock has not made significant progress in several years, but is currently surging higher. Earnings and revenue figures have been decreasing, which has left investors optimistic. Relative to its peers and sector, Sears has been an average performer year-to-date. WAIT AND SEE what Sears does the rest of this quarter.

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