Will Recent News Hurt Sears Stock?

With shares of Sears (NASDAQ:SHLD) trading around $38, 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’ presence on Chicago’s State Street is about to end. The retailer announced Tuesday an April closing for its flagship store. In an e-mail, a Sears Holding Corp. spokesperson said the Hoffman Estates-based company can no longer support the store’s operating losses. Sears opened the store with great fanfare in 2001, receiving $13.5 million in tax increment-financing assistance from the city. The spokesperson says the store’s operational performance “has been poor through much of its existence.” Sears officials say about 160 employees will lose their jobs. They will be able to apply for positions at other Sears or K-Mart stores. The retailer will begin liquidating the store’s merchandise on January 26. The Sears spokesperson said the closure is part of efforts to reduce expenses and transform the retailer’s business model.

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 below 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

66.62%

23%

20%

What does this mean? This means that investors or traders are buying a 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 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 not been too happy 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

-21.40%

-9.04%

-28.60%

3.46%

-7.99%

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 announced Tuesday an April closing for its store on Chicago’s State Street. The stock has not made significant progress in several years, but is currently surging higher. 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. WAIT AND SEE what Sears does the rest of this quarter.

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