My Retail Naughty & Nice Lists

Of late, I've had a very bearish view on the markets.  For the most part, I still do.  However, in the near term, I think the post-holiday earnings season will have some upside surprises as well as some well-deserved precipitous falls.  After reviewing some conference call transcripts, earnings reports, trends within those, and some personal observations, I think the wheat and the chaff will get distinctly separated in the next round.

Among retail, I think the following companies (by no means a complete list) will surprise to the upside in their next quarterly earnings reports (in no particular order):

Kohl's (KSS)
Macy's (M)
Target (TGT)
Walmart (WMT)
JC Penney (JCP)
Best Buy (BBY)

The following is my Naughty List.  These are companies late to the on-line migration game and poorly managed such that they are, in my opinion, in a free-fall.

Nordstrom (JWN)
Sears (SHLD)

I know there are lots of reports of Walmart and Target having lack-luster crowds, but the Target stores in West Michigan that I saw had full parking lots when I passed them.  Walmart seemed eerily quiet, but their online shopping site was so burdened with traffic that they had problems keeping it working properly.  That likely means that traffic merely shifted to on-line.  Given the history of Walmart on Black Fridays Past, I certainly understand the sentiment - great deals, but unruly crowds.  JC Penney is reporting better than average e-sales, and their stores in West Michigan appear plenty busy.  They's been turning their operations around for some time now and it's showing.  Even their on-line presence is easy to navigate and they offer the brands my family likes to buy.

I was actually shocked at how full the Macy's (M) parking lots were.  They were getting slammed at 10:00 Saturday morning, and Best Buy was almost equally busy.  Nordstrom Rack had an anemic showing at that same time with an all-but-baron parking lot.  The only parking lot more empty was our local Chipotle (CMG) who I don't think was open for business yet, but I typically find that Chipotle low on traffic (in all fairness - location is likely the issue there).  Nordstrom Rack near my home is typically a ghost town, and it seemed even lighter on "Small Business Saturday."  Ouch!

As for Nordstrom proper, nearly everything they offer is either cheaper elsewhere.  They didn't even discount the Fitbit (FIT) Surge that is $199.95 everywhere else on the net (WMT, TGT, KSS, AMZN, etc.).  It's full price ($249.95) at Nordstrom (JWN).  Their management says they've noticed a slowdown in sales and foresee a continuation in these trends.  As for what's working and what's not, they've, "got nothing to point to.  It's just foot traffic."  As to what led to the foot traffic slowdown, They admitted to not knowing why.

I have a few ideas.  They are bested by the likes of Macy's, JC Penney, L Brands, Hudson's Bay, and others.  For goodness sake, herroom.com is better equipped on line.  Listen to the Q&A session.

Sears has been on a downward slide for some time now.  A look at their online trend data compared to others, it's apparent that they're just not functioning toward an ongoing future.

While Kohl's is getting its footing in the e-commerce arena, they are VERY well managed.  I've noticed a general drop in foot-traffic over the years, but in looking at their financial data I can see that their management has done a great job at managing costs while still managing a competitive retail environment.

So those are my lists, naughty and nice.

Disclaimer:  I trade stocks and options so I may at any time have positions, long or short or equivalent, in any of the companies mentioned in this piece.

I've Had It With All The Bull. I'm Turning Bear!

That's it.  My identity crisis is over.  I'm officially a BEAR.  I've made higher gains in 2 weeks of trading PUT options than all the years I've had trying to buy and sell stocks as a Bull.  If you ask me, it's all a BUNCH OF BULL.  It's all hype.  It's all smoke and mirrors until you get a look under the hood and learn to see what's really going on.

Good companies will show themselves when we look at their books and bad ones will look odd.

SO, here's my BEAR ALERT for this week:

KITE

I'm not really of a mood to trust analyst ratings, especially when they all seem to be TOO in love with a company.

If you want to know more about what the company does, here's a link to their web site:
http://www.kitepharma.com/

It's an interesting thesis for sure, and I for one would hope and pray that there is real promise in what they say they are doing.  BUT I'm not in this for hope and prayer, I'm looking at a business and the trends in the business here disturb me.

If you look up KITE's information at your broker or on sites like Finviz (Images in this article are from FinViz), you will see that the price to sales ratio is over 487.  That means that the price of the stock is more than 487 times the the gross sales of the company.  The price to book ratio is 9.35.  Bristol Meyers' is only 7.06.  But WAIT!  It gets better.  The Price to FREE CASH FLOW ratio is 1077.75.  That means that you, the buyer of the stock at over $80/share are paying more that 1000 times the free cash flow of the company.

But the cash of the company is $8.98/share.  So, the free cash flow of the company is less than 1 cent per share.  They appear to have no debt, so at least they're not heavily leveraged.  But then when I started looking at the mechanics of the ownership of this company, I saw something rather odd:

If you look at the Annual Earnings of KITE in 2012, 2013, and 2014, you'll see that it goes from -0.48/share to -1.43/share to -1.91/share in 2014.  For a startup company developing a new product, this may seem normal and the acceleration may seem to be slowing, BUT there's another part to what's going on.

Recall that the earnings are being quoted on a PER SHARE basis.  That means that the total losses are really a function of the shares outstanding.  If that number were constant, there would be no problem, but unlike good companies like Disney (DIS), Schlumberger (SLB), or others who buy back their share and INCREASE value to the share holders, KITE has been increasing shares.

In 2012 they had 5.31 million shares outstanding with that -0.48/share loss.
In 2013 they had 5.47 million shares outstanding with the -1.43/ share loss.
In 2014 they had 22.82 million shares outstanding with their -1.91/share loss.
Currently, they stand at 43.73 million shares outstanding with authorization for 200 million shares.

So where are all these shares coming from?  I would normally figure that it's from the sale of stock to raise cash for operations until they get FDA approval for their product and/or service.  But something seems to have emerged this year and I think people are beginning to take notice.

If the prospects of this company are REALLY as good as the promoters of its stock would have you believe, then the directors and officers of the company would be buying as the opportunity presented itself.  They would even retain some of the shares they get in options as pert of their compensation packages.  However, looking at the insider transactions of KITE, I can see that it's quite the opposite.  The officers of this company have REDUCED their personal stakes in the company and at every turn, and it seems quite frequent, they are cashing in on options and dumping the shares on the market.  In fact, they have done NO buying at all except to execute AUTOMATIC SALES to the market.

Perhaps it's not as nefarious as I'm reading into it, but it looks to me that the officers and directors of KITE are lining their pockets with money from the people buying the stock from the market, and the money never goes into the books of the company, and the shareholder value is HEAVILY diluted.  Meanwhile, the stock is at ALL TIME HIGHS for it's price.

I may currently or at any time have or close a short or equivalent position in this or any other security, but for now, I see trouble ahead as people get wise to the shareholder dilution and the accelerating losses that are being masked in PER SHARE comparisons to analyst estimates when in fact it looks a little more like a shell game.

If one wants to look at this as being a time for a normal retracement, then let's look at the Fibonacci ratios:

I'd say this thing could EASILY hit $60 in the coming week to 2 weeks.

My rating for this company is SELL!  This company is bloated and frothy even if their technology will EVENTUALLY pan out.  For now, it's an expensive piece of BLUE SKY.

I'm not an accountant, and I'm not a financial professional, so you need to do your own due diligence, but these do not look to me like the books of a "best in breed" company.