Can Sears Stock See a Turnaround?

With shares of Sears (NASDAQ:SHLD) trading around $50, 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 companys 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 plans to spin off its Lands’ End Inc. unit, giving investors a piece of a profitable clothing brand amid almost nine years of market-lagging returns for the department-store chain’s shares. The distribution is subject to the approval of the board and other conditions, Hoffman Estates, Illinois-based Sears said in a statement. The unit’s registration filed with the Securities and Exchange Commission didn’t say how many Lands’ End shares Sears investors would receive.

T = Technicals on the Stock Chart are Mixed

Sears stock has not made significant progress. The stock has been pulling back recently 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

67.50%

63%

61%

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

Put IV Skew

Call IV Skew

December Options

Average

Average

January 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 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 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 = 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

20.89%

28.46%

-57.90%

33.19%

7.16%

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

Conclusion

Sears operates as a specialty retailer in the United States and Canada. The company plans to spin off its Lands’ End Inc. unit, giving investors a piece of a profitable clothing brand amid almost nine years of market-lagging returns for the department-store chain’s shares. The stock has not made significant progress and is currently pulling back. 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 an average performer year-to-date. STAY AWAY from Sears for now.

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