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What Investors Missed in the Market This Week

By Daniel Miller - Apr 1, 2017 at 3:46PM

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Here are some highlights from economic data this week as well as some companies making big moves and big headlines.

Well, it finally happened: For the first time in almost half a decade, the U.S. economy posted a consumer inflation rate above the Federal Reserve's 2% target. During February, the personal consumption expenditures price index moved 2.1% higher than the prior-year result, which is a positive sign for the economy after inflation had been historically low in recent years. Setting that aside, there were a handful of companies making big moves or big headlines this week in the markets -- let's look at a couple highlights and one thing for investors to watch next week.

A crazy rollercoaster ride

If there's one stock the market can't quite figure out, it's Sears Holdings Inc. (SHLDQ). In a sense, consumers have already spoken, and it has left Sears with declining foot traffic, declining sales, a weak e-commerce business, and stores shuttering left and right. It has honestly been a sad decline for a company that was once a retail juggernaut, and its stock price reflects that with a 91.5% decline over the past decade.

Wall St. road sign with an American flag in the background.

Image source: Getty Images.

What's even wilder is that large institutional investors are hopping on board, as well as the CEO, Edward Lampert, and are buying up shares. The large share purchases, which we'll cover in a second, come after last week's decline in share price after the company noted there are concerns about its ability to avoid bankruptcy. Lampert purchased almost 526,000 shares last week at an average price of $8.21, which means his entire stake is almost 30% of Sears' total shares outstanding -- that gives new meaning to the saying "go big or go home." Around the same time, an SEC filing affirmed that Bruce Berkowitz of Fairholme Capital Management bought roughly 287,000 shares of Sears stock between $8.05 and $8.46 per share.

Those purchases helped trigger a strong rebound in Sears' stock this week, and typically, insider buying is viewed as a positive move. It's also likely that these large purchases and the rising stock price triggered a short squeeze.

The truth, in my opinion, is that this company is destined to hit $0. The insider buying is probably less of a positive event and likely a move by Lampert and Berkowitz to gain more influence on the timing of Sears' seemingly inevitable bankruptcy, as my colleague Adam Levine-Weinberg points out:

An 80% stake in Sears was worth less than $700 million a week ago. By contrast, Lampert and Berkowitz have far more money tied up in Sears' debt and in related companies like Seritage. Lampert, ESL, and Fairholme together appear to hold roughly $2 billion of Sears debt and own a substantial proportion of Seritage, which has a sizable market cap of $2.4 billion.

In other words, don't buy into Sears' rebound this week -- literally or figuratively.

LULU Price Chart

LULU Price data by YCharts.

Insert yoga joke here

"Downward slump" isn't a yoga pose, but that's what shares of lululemon athletica Inc. (LULU -2.00%), a producer of popular yoga apparel, among other products, are doing this week with an 18% decline.

The driving force behind Lululemon's decline this week was a disappointing fourth quarter and weak guidance. During the fourth quarter, sales increased 12% compared to the prior year, and comparable-store sales were up 8%. Those results aren't bad at all, especially compared to the woes facing most retailers this year. The issue for investors was management's admittance to a slow start to 2017, with same-store sales expected to decline in the first quarter.

Despite the slow start, management still anticipates full-year sales growth to check in between 11% and 13%. But Wall Street analysts weren't buying it, and many cut their price targets as lululemon's stock dropped to just under $52. Telsey Advisory Group cut its price target from $92 per share down to $78. Deutsche Bank cut its price target from $65 per share down to $58, and Susquehanna Financial Group significantly cut its price target from $82 per share down to $57.

At a time when many retailers are struggling, there's a clear discrepancy between where management believes its business is going and where Wall Street expects it to go -- investors might be wise to watch this one from the sidelines for now.

Auto sales on deck

Investors have grown accustomed to the U.S. new-vehicle market consistently growing sales since the Great Recession, but there's a good chance that ends this year, and that 2016 will go down as this cycle's peak year. That doesn't mean the good times are over, because the industry is likely to plateau near historically high levels of annual sales in the years ahead. However, investors within the automotive industry would be wise to watch the level of incentive spending by major automakers as competition for market share heats up. Next week, when major automakers release sales figures, incentive spending, and inventory levels, it should give us insight into the current health of the industry.

"If you only look at the sales numbers, it could be tempting to say that the industry is just as strong as it was a year ago," said Jessica Caldwell, Edmunds' executive director of industry analysis, according to Automotive News.

But there are several areas of concern this year lurking just below the surface. Inventories have reached levels not seen in more than a decade, and incentives are rising. We're also seeing an increase in loan duration and indications of an increase in subprime lending, both of which demonstrate sales aren't coming as easily as they used to. 

Looking at Detroit automakers, which continue to trade at steep discounts compared to the S&P 500 average, General Motors (GM -0.55%) is expected to gain roughly one point of market share, according to Kelley Blue Book and ALG estimates. On the flip side, GM's cross-town rival, Ford Motor Company (F 0.25%), is expected to post the largest market share decline thanks to a reduction in fleet deliveries offsetting small retail gains.

We'll see how the industry shakes out Monday, and a better-than-expected result could be just what the market ordered for a strong start to the week.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$287.48 (-2.00%) $-5.88
Ford Motor Company Stock Quote
Ford Motor Company
$12.04 (0.25%) $0.03
General Motors Company Stock Quote
General Motors Company
$34.63 (-0.55%) $0.19
Sears Holdings Corporation Stock Quote
Sears Holdings Corporation

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