Why Retail Stocks Are The New Big Short

Traders and investors are taking extraordinarily high short positions ahead of retail stocks' earnings results in a development that some call the new "big short." Those betting against the sector have amassed their strongest positions in a year, with short positions in the SPDR S&P Retail (XRT), the sector’s benchmark exchange-traded fund, about four times higher than shares in the ETF itself, per S3 Partners, as cited by The Financial Times.

Many traditional retailers have demonstrated resilience in the face of rapidly transforming consumer trends, “But a lot of these retailers are in for a long secular decline. It’s unequivocal that the trend for purchasing online will continue to increase,” said Stephen Ketchum, founder of Sound Point Capital, a hedge fund and collateralized loan obligation manager with $19.4 billion of assets under management.

This may spell bad news for giants such as Macy's Inc. (M) and Nordstrom Inc. (JWN), as well as smaller player including Abercrombie & Fitch (ANF) and Urban Outfitters (URBN), according to Deutsche Bank, per Barron’s. 

4 High-Risk Retailers

·     Macy’s

·     Nordstrom

·     Abercrombie & Fitch

·     Urban Outfitters

Source: Deutsche Bank

Short Interest in Retail ETF Jumps More Than 200%

During the financial crisis a decade go, “the big short,” generated huge gains for investors who bet against the housing market and subprime mortgage loans. Short interest in XRT has skyrocketed from just 129% of shares outstanding in September, to 453% this month.

Brad Lamensdorf, a portfolio manager at Ranger Alternative Management, echoed Ketchum’s downbeat sentiment on retail. He notes that while a handful of companies have managed to stay afloat in the digital era, a number of them have posted “horrendous” metrics, with others forced into bankruptcy, such as Payless ShoeSource and Gymboree. To make matters worse, “there are also a lot of signs that the consumer is buckling,” said Lamensdorf, pointing to indicators such as rising car loan delinquencies.

Not all retailers are expected to flop in the coming quarter. Discount retailer TJX Companies Inc. (TJX) is expected to see annual net income rise 17%, while electronics retailer Best Buy Co Inc. (BBY) is forecasting a 44% increase. 

Looking Ahead

Negative headwinds for retailers aside, it’s important to note that investors have lost big money going short on many of these stocks. Short sellers who bet against the sector at the beginning of 2017 have incurred losses, with the XRT ETF up roughly 5% over the period. While many of these retailers face difficult times ahead in the face of Amazon.com Inc. (AMZN), many are proving to be stubborn survivors. That means short sellers will have to remain highly selective.