Avoid These Two Retail Stocks Despite Black Friday Bump

Black Friday and Cyber Monday set new sales records in the U.S., though you wouldn’t know it from the way retail stocks are behaving.

The SPDR S&P Retail ETF (XRT), a fund that tracks the price of retailers such as Gap (GPS), Tiffany (TIF) and Best Buy (BBY), is actually down a couple percentage points since Thanksgiving. Meanwhile, normal Cyber Monday winners like Amazon.com (AMZN) (-2.8%) and eBay (EBAY) (-2.2%) have stumbled despite record-smashing mobile and online sales on both Black Friday and Cyber Monday.

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Perhaps they’ll bounce back once other growth sectors get going, which could happen soon now that the FANG stocks (Facebook, Amazon, Netflix and Google) are perking up. For now, though, retail stocks are all but absent from the post-election rally … with a few exceptions. At first glance, two exceptions in particular are quite tempting.

Let me first show you the six-month charts of these two hard-charging retail stocks before revealing their names.

ODP

SPLS

Not bad, right? Both charts show sharp dips in October (particularly the second chart) after two months of base building, followed by monster upward moves to new highs starting in November. Based on all that share price momentum, these look like two retail stocks worth buying.

Now let me show you the one-year charts and reveal the names of both stocks.

ODP-2

SPLS-2

Quite a difference.

The top chart is Office Depot (ODP), the below chart is Staples (SPLS)—two dying office-supply retailers whose merger attempt failed in May (notice the big May gaps in both charts) when it was blocked by a federal judge due to antitrust concerns. The proposed deal was a way for the two rival retailers to join forces amid years of sales and earnings declines. Office Depot’s sales have slipped for three straight quarters and in six of the last seven quarters. Staples’ sales have dipped every year since 2012, and are on track for another drop-off this year.

The stocks of the two shrinking office suppliers have tumbled accordingly: both ODP and SPLS have lost about half their value since peaking in late 2014/early 2015—and that includes the recent run-ups. While both retail stocks are trading above their long-term moving averages after those big November jumps, I still wouldn’t advise investing in either of them. Years of revenue declines are never a good sign, especially with increased competition in the office-supply space from online alternatives such as Overstock.com and Amazon.com.

So, while Office Depot and Staples are technically exceptions to the post-Black Friday malaise among retail stocks—ODP is up more than 60% since the start of November, SPLS has climbed more than 30%—both run-ups are based on little more than short-term buying from bargain hunters.

With sales and earnings at Office Depot and Staples expected to slide yet again in the current quarter, I wouldn’t expect the rally in either stock to last much longer.

If you’re looking for retail stocks to buy at a discount, you’d be better off buying AMZN or EBAY while they’re down.

Chris Preston

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