Sears Stock Prices: Why You Should Stay Away From Sears Stock

| November 8, 2010 | 0 Comments

Just the other night, I was talking with a friend who used to play pro baseball.

He was an expert hitter… and before long, our conversation drifted to the recent World Series and baseball.  He said over and over again, the difference between success and failure at the highest levels was mental… It was all confidence.

When he stepped into the batter’s box, he had to have confidence.  He was of course facing off against some of the greatest pitchers of our time.

Confidence was the difference between hitting the ball and striking out.

The success of our economy also depends a lot on confidence.

It’s very tough to have a strong economy without confident consumers. One of the most watched economic numbers is consumer confidence.

There are a handful of organizations publishing these statistics.  ABC has one confidence number, the Conference Board posts another, and the University of Michigan publishes a third.

All of the numbers are determined in a similar way.  A survey of consumers is made on a regular basis.  They’re all asked a series of questions intended to gauge their confidence in the economy.

The more positive the response, the higher the numbers.

Why are these numbers so important?

Remember, the US economy is driven mainly by consumer spending.  Some 70% of our economic activity is tied to consumers.  Clearly, the more confident consumers are, the more they buy… The more consumers buy, the stronger the economy is.

How confident are consumers right now?

A quick look at the University of Michigan indicator shows confidence numbers bottomed in the early part of 2009.  Since then, confidence levels have been slowly moving higher.

Despite the recent climb, we’re just now reaching the confidence lows hit during the 1991 recession.  And we’re a long, long way from the highs set back in late 1999.

But the trend is telling…

I believe rising consumer confidence numbers mean this holiday shopping season will be better than expected.  Consumers are tired of not spending money… Everyone cut back in 2008 and 2009.

And unemployment numbers are moving in the right direction (down!).  It allows consumers to breathe a little easier and open up their wallets more freely.  Add it all up and we’re seeing a number of reasons why consumer confidence is improving.

Simply put, more confidence means more spending… and more spending is good for the retail industry.  You’d think retail stores are poised to rise across the board.

But that may not be the case…

When I started looking at the retailers, I noticed something interesting.  It looks like many have already started moving higher.  But one company jumped out at me, not because it was undervalued, but the exact opposite.

Sears Holdings (SHLD) looks incredibly overvalued.

Sears is so overvalued, I say stay away from this stock.

The numbers just don’t make sense.  The first thing I looked at was their P/E ratio.  Sears’ ratio is a robust 27x while the industry is hovering at a more modest 14x.  This number alone implies Sears is overvalued by almost 50%.

Next I looked at their growth rates…

While the industry is expected to grow over 14% a year for the next five years… Sears trails the pack.  Their projected growth rate is 40% lower than the industry average!  Again, this tells me the stock is overvalued.

However, the clincher for me was their earnings estimates trends.

Wall Street analysts who eat, breathe, and live this stock have been slowly cutting their profit estimates.  In just the last 90 days, the group has taken a hatchet to projections… They’ve cut profit estimates on Sears by more than 20%.

Just as a comparison, Macy’s (M) has seen their 2011 and 2012 estimates move higher!

While positive economic news should be great for retail stocks, Sears looks to be the odd man out.  I’d stay away from this stock… I just don’t have confidence in it.

Tags: , , , , , , ,

Category: Stocks

About the Author ()

The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

Leave a Reply

Your email address will not be published. Required fields are marked *