More Pain in Store for Stores

09/10/2008 12:00 am EST

Focus: OPTIONS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, finds two retailers he says are likely to get hit hard by the weak economy.

The ChangeWave Alliance's Consumer Spending survey, completed in August, contains some of the worst results we have ever seen when it comes to where consumers won't be spending their money.

But that just means that the consumer discretionary spending segment is fertile ground for short-side positions. And today is the day to get positioned in Bed Bath & Beyond (Nasdaq: BBBY) and Sears Holdings (Nasdaq: SHLD), two companies that are already feeling the blues of a bleak back-to-school season.

First, let me share some data from our Consumer Spending report:

"Overall consumer spending is still deep in the doldrums, with 44% of US respondents saying they'll spend less money over the next 90 days-one point worse than our July survey and the lowest percentage we've registered in more than four years. Just 24% say they'll spend more. Respondents report continued dissatisfaction with their personal finances."

Our proprietary research is confirmed by third-party data. The University of Michigan's survey of consumer confidence reported a near-50-year low and the lowest-ever (since 1946) consumer attitude rating about their own personal finances, with 57% of respondents to the survey saying their personal financial situation was deteriorating.

Going back to our survey, the two retail chains with the greatest negative change in consumer shopping trends were Bed Bath & Beyond and Sears.

BBBY "should" be increasing its market share due to the recent bankruptcy of its major competitor, Linens 'n Things. Our survey says otherwise, as it is losing share to deep discounters—Wal-Mart Stores (NYSE: WMT), Costco (Nasdaq: COST) and, to a lesser extent, Target (NYSE: TGT).

BBBY is having a rough back-to-school season and is slated to endure an even rougher holiday season, which is the basis for this short-side position.

My only concern with the stock is that it has reasonable technical support and is trading above its 50-, 100- and 200-day moving averages.

That being said, I believe the stock—currently trading around $32—will test its yearly low of around $25. To profit from its slowing business, I recommend buying the BBBY January $27.50 Puts (BHQMY) under $1.40. (They traded near that Tuesday—Editor.)

Sears is a slow-motion, but accelerating, train wreck. It's a terrible store, run by a financial manager, and it has little or no appeal except to people with Sears credit cards. Do you know anyone who shops there?

The short interest in the stock is large and growing—27% of the float—but I think we can ride out the volatility. The stock is hitting its 25-day moving average and should bounce off it-downward-and technical support is weak at best.

The stock is trading around $92 and it should also re-test its yearly lows of $67. Buy the SHLD January $70 Puts (KTQMN) under $4.00. (They were selling above that Tuesday—Editor.)

Editor's Note: Short selling is suitable only for extremely risk-tolerant individuals who can afford to lose their investment.

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