Shoppers' retreat from department stores and mall chains is prompting stock traders to stalk the retail sector with a fervor unseen in years.
Sales and profits at major retailers have come under immense pressure this year, punishing the shares of Macy's Inc., Nordstrom Inc. and Kohl's Corp. The SPDR S&P 500 Retail exchange-traded fund has fallen 11% this year, through Wednesday, lagging far behind a 9.1% rise in the S&P 500. Macy's is down 41% for 2017 and Target Corp. is down 30%. Wall Street is abuzz with talk that the rise of e-commerce giant Amazon.com Inc. spells the eventual end of traditional retail, a notion that many in the industry vigorously dispute.
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Retail's retreat and the accompanying debate have created fertile ground for investors who buy unloved stocks, whether for a brief bounce and quick sale or in some cases a bet that the doomsday talk is overdone. This onslaught of bargain-seeking value investors, trend-playing hedge-fund portfolio managers and quick-turnaround day traders is fueling a surge in trading volume and sharp price swings in an industry that for years was a backwater to hotter industries such as technology and financial services.
Trading has been frenetic. Macy's, the largest U.S. department store chain, had its highest trading volume of any month since 2011 in May, with June not far behind. Shares fell 17% on May 11, their worst performance since 2008, after a quarterly decline in same-store sales. May and June were also two of the five busiest months in the past five years for Kohl's and Target.
"With this recent huge slump, a lot of large retail companies went on the radar for us," said Eric Mancini, director of investment research at Traphagen Financial Group in Oradell, N.J., which has $530 million in assets.
After Amazon announced a deal to buy Whole Foods Market Inc. for $13.7 billion on June 16, shares of Wal-Mart Stores Inc. sank 4.7%. Mr. Mancini jumped into the fray soon after.
He bought shares of Wal-Mart for his clients with larger portfolios, reasoning that valuations looked attractive after the share-price drop. He picked up shares at a price of around $75 apiece and plans to hold them until the stock price climbs to the $80 to $90 range, he said. The shares closed Wednesday at $73.94.
He isn't alone in betting the selling on major retailers is overdone. SunAmerica Asset Management and BNY Mellon Asset Management, are among the investors that increased their stakes in Macy's between the end of last year and March, according to S&P Capital IQ. UBS Asset Management and Northern Trust Global Investments increased their stakes in Nordstrom Inc. during that period.
Amazon's rise threatens traditional retailers because it means they must fight harder for every dollar of already scarce sales growth, at a time more U.S. retail sales are being conducted online. A recent 2,000-person U.S. shopper survey conducted by RBC Capital Markets found that 93% selected Amazon as the online shopping website they use most often, compared with 89% last year.
Stock traders have become particularly attuned to the notion that Amazon's gains are other retailers' losses, potentially fueling a buy-Amazon, sell-retail trade that could exacerbate the traditional retailers' woes. On Amazon's 10 best-performing days this year, Macy's has fallen 2.7% on average and Kohl's has dropped 3.1%. The retail ETF was down 0.9% on average those days.
Investors are betting retail stocks will keep falling, and in many cases it has paid off. Those who went short on food and staples retailers, for example, made $116.3 million in paper profits on the day after Amazon announced its Whole Foods acquisition, according to IHS Markit.
ETF provider ProShare Advisors filed plans with securities regulators last week for new double- and triple-levered ETFs designed to rise on days that retail stocks fall, adding firepower to bets on their decline. Also coming is an ETF that goes "long" on online retailers while "shorting" traditional ones.
Because so many investors are betting that retail shares will fall, the slightest bit of better-than-expected news is apt to cause the shares to surge, a condition that lays the groundwork for much-larger price swings as short sellers buy back borrowed shares to return them to the owner.
On Thursday, Target raised its quarterly guidance for same-store sales and earnings, pushing shares up 3.1% in recent trading. Other large retailers also gained on the news, with Macy's shares climbing 3.9%, and Gap Inc. shares advancing 3.2%. The three companies were among the six best performers in the S&P 500 by percentage gain.
The 30-day implied volatility of the retail ETF was over 19 this week, according to Thomson Reuters data. That is well above 14.7 on a comparable technology ETF and nearly as high as an ETF of biotechnology stocks known to have particularly large swings, which was at just over 20.
That volatility has been a boon to day traders, who often jump in and out of stocks in the span of a few hours to ride small moves in their prices. On StockTwits, a social-media platform that is popular with day traders, average message volume about Macy's, Nordstrom, Kohl's, J.C. Penney Co., and Sears Holdings Corp. has collectively more than tripled since the end of last year.
"People day trade on volatility," said Vlad Karpel, a day trader in Chicago who also runs Tradespoon, a firm that uses models to offer buy and sell signals on stocks. "Traditionally, it's been biotech stocks, penny stocks or leveraged ETFs. Recently, it's been retail stocks."
On June 27, after the market closed, Mr. Karpel's models generated a buy signal on Best Buy Co., suggesting the stock was oversold. He said he put in an order to buy 1000 shares the next day if the stock hit a price of $56.80. It did so in the first half-hour of trading, and he held on to the shares until they climbed to $57.10 within an hour. He then sold, netting about $300.
Friday could be another big day for retailer stocks. The Commerce Department will report retail sales for June. Analysts expect a 0.1% rise from the prior month.
Write to Ben Eisen at email@example.com
(END) Dow Jones Newswires
July 13, 2017 10:37 ET (14:37 GMT)