In this section, we look at two stocks that are in a bit of trouble. You might say they’re sick both fundamentally and technically. For one reason or another both stocks have caught our attention and we think investors should be cautious because the downside risks are increasing. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider. Company Overview Myer (MYR) – Shares were hammered this week falling 11% following renewed concerns about the launch of Amazon and weak consumer spending. The concerns came from a bearish report released by Credit Suisse. The broker downgraded the stock to Underperform from Outperform with a target price of 82c which is a 44% downgrade from its previous target price of $1.44. Quite a savage hit. The report was gloomy to say the least. The broker says the entry of all conquering Amazon and TK Maxx is set to smash Myer and the discretionary retail space in ways that Myer won’t be able to overcome. Both new entrants will be selling premium brands but at discounted prices. TK Maxx has outlined its plans to open 35 stores and Amazon to roll out its E-Commerce offering and convert shoppers to the digital revolution. On the back of all this, Credit Suisse sees no hope for Myer and has downgraded its forecasts on the back of weak sales growth. RCG Corp (RCG) – Earlier this month the footwear retailer was slammed with shares being sold off by almost 28% after it announced a FY profit downgrade. Guidance was cut by 11% which makes it the second downgrade in three months after sales of brands such as Skechers, Vans and Doc Martens stayed soft in March and April. It’s shocking news for the company that is trying to stay afloat. It now expects underlying EBITDA for the year ending June to come in between $74m-$80m compared with $60m in 2016. Shares have tumbled from $1.06 at the start of April to 60c on Monday. That’s an almost 50% loss in the space of month.
On the StockOmeter both MYR and RCG rate pretty ordinary. MYR came in at around 55 but we think this could fall further. The stock is trading on a PE of 12.62x but its ROE is low and falling. That’s a worry. In-fact the only retailers that have rising ROE’s are WOW and WES. RCG isn’t any better. The StockOmeter reading is 53, much of a muchness. PE is lower at 9.74x and its ROE is also quite low and dropping. If you had to pick between the two on fundamentals, you’d probably pick RCG. It’s cheaper and its ROE is higher. Its dividend is also higher. Technical Analysis
Both RCG and MYR charts aren’t too attractive. On technicals RCG is a falling bus. Whilst there could be a bounce, we advise not to go near it. Everything is pointing to bearish sentiment, the stock is in free fall and has exhibited a death cross. MYR too is exhibiting early signs of a sustained downtrend. It too is showing bearish sentiment. We advise against buying either stocks on technicals.
Myer Holdings (MYR)
- Citi has a Buy recommendation with a target price of $1.30. The broker seems fairly bullish on the stock and says Q317 sales will come in at $663m which represents a fall of 1.9% on the pcp. Like for like sales are tipped to fall by -0.9%. This represents a fall of -0.5% like for like sales from 2Q17.
RCG Corp (RCG)
- Morgans has downgraded to Hold from Buy recommendation with a target price of 68c. The recent trading update and subsequent profit downgrade disappointed the broker. As a result Morgans has lowered their forecasts for FY17 to be in line with the company’s downgraded forecasts.
Unconventional View The retail sector seems to be stuck in a world of pain. There are real concerns that the damage has already been done with the imminent arrival of Amazon. Just take a look at this week’s dismal retail sales figures. Retail sales missed by a long shot sliding 0.1% in seasonally-adjusted terms coming in well below a consensus forecast of +0.3%. It’s concerning to say the least. It marks the third fall in the last four months. Some blaming Cyclone Debbie for the weak result. Analysts now fear the retail sector is in dire straits with the imminent arrival of Amazon. Citigroup says the retail sector is on the verge of recession. If you were holding out, those hopes have been dashed with these retail sales figures. RCG has downgraded profit and Myer isn’t looking good. On Thursday MYR posted a Q317 sales fall of 3.3% down to $653m which was lower than Citi’s forecast of -1.9% at $663m. This result has dashed MYR’s hopes of delivering its 3% annual sales growth target and any real recovery in its share price. MYR has however reiterated its guidance for FY EBITDA growth to exceed sales growth in FY2017 and increased NPAT over FY2016. We think Credit Suisse may have over-reacted just a wee bit on their MYR downgrade earlier in the week. But competition is set to get a whole lot tougher in this space. The entry of Amazon and TK Maxx will all be too much for Myer and RCG. Whilst there is still some time before either of these two entrants launch, the market has already taken to both and sliced them in half. MYR first floated at $4.10 and reached a low of 83c back in 2015. Looks like it’s going back there again. The only catalyst that could surprise on the upside is a takeover bid from either Solomon Lew or Woolworths SA. Lew is still lurking around and hasn’t detailed his plans with his 11% stake in the company. We think this story has some way to play out. The retailer’s online offering is archaic in comparison to Amazon. It takes up to 7 days for delivery which is a lifetime in the online space. A takeover move by Lew’s could present new direction and new blood to a deteriorating business. So don’t write off MYR just yet. Myer is due to release its third quarter sales results on Thursday. In summary, we wouldn’t buy either stock. There’s too much downside risk and the environment looks too challenging. We simply can’t see either MYR or RCG getting out of this pickle anytime soon. The charts are horrible and the fundamentals aren’t appealing. Unless you’re looking for a short-term trade on a bounce, we think it’s best to avoid both stocks.