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Changes on the Margin

We’re seeing some notable changes in our sentiment monitor following the most recent short interest release. WMT, HBI, GIL, CRI, JCP, KSS, M and LIZ scores are among the most notable.

As for retail overall, short interest remained relatively unchanged since the prior release on Feb. 9th. We saw the greatest changes out of Large cap retail (-0.2% PoP) with less meaningful changes out of the small and mid cap names. While sales sold short in mid cap retail increased 0.40%, it was driven entirely by a 1.8% increase in short interest for CROX. Likewise, small cap interest remained relatively unchanged with the only notable deviation out of JNY (-0.12%). In large cap retail, short interest increased the most for LOW(+1.5%), SHLD(+0.7%) & TGT(+0.3%) while JCP(-1.3%) experienced the most short covering over the past 2 weeks. Short interest as a percent of float accounts for 50% of a company’s overall sentiment score in our calculation.

Company callouts (see charts below).

1)      Wal-Mart is sporting  a 62 on our Sentiment Monitor (0 = investors are very negative, meaning that it is a bullish indicator. 100 = investors are overly positive, meaning that it is a bearish indicator). This is WMT’s lowest level since we started this index.

2)      On the opposite end of the spectrum, Macy’s broke 80 on the upside, marking the most positive sentiment we’ve seen out of Macy’s – ever. We still think that this name will be impacted as the mid-tier (where it competes on the fringes) gets increasingly price competitive.

3)      HBI and GIL are sitting between 60 and 70. It’s not the positive sentiment that surprises me as much as the fact that it has not changed meaningfully since each of them printed results. Sentiment should be much much worse. We still like them both on the short side.

4)      Carter’s sentiment is still in negative territory, but has definitely returned to a positive trajectory. This is a name we’d definitely press as sentiment climbs past economic reality (ie about now).

5)      KSS is really taking it on the chin. After hitting a score of 90 as recently as six months ago, KSS is sitting around 55 today. It’s still too early to own that one. We think there’s more downside to go.

6)      JCP puzzles us. Despite all the positive press around the analyst meeting, Ellen, and JCP getting the early jump on KSS, its negative sentiment has really not changed much over the past six months, and even year to date.

7)      LIZ is above double digits in both stock price ($10.10) and sentiment. But the latter (a measly 12) has much more room to go – as does the stock.

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - sentiment tables

 

Sentiment Framework Methodology

Our updated Hedgeye Retail Sentiment scorecard is published in conjunction with last night’s short interest release. As a reminder, we use our Scoreboard as a piece of our TRADE (Trade=3 week or less duration) framework. The sentiment scores combines buy-side and sell-side conviction measures (Including Buy/Sell Ratings & Short Interest as a percent of float); we standardize those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. The idea is that a contrarian strategy can be employed at the extremes (positive extreme >90, negative extreme <20) to screen for names that provide the opportunity for the greatest upside relative to the consensus view.  A sentiment score above 90 (overly bullish) has proven to be a good historical ‘sell’ signal, while a signal below 20 has proven to be better to Buy.  We recognize that some names may break into the 90+ or 20/below thresholds and won’t immediately trade contrary to consensus. In fact, companies like Nike & LIZ have remained in the high/low bands over extended period of times. While our sentiment monitor acts as an excellent screening tool at major inflection points, we incorporate additional tools/analysis (SIGMA, Management Scorecard, etc.) to properly contextualize fundamental opportunities across all durations. Some stocks will never break out of their band, but marginal directional changes matter.  We have back tested these levels for our group and the result can be seen below. Note that the analysis below was performed using the ~100 companies included in the monitor when the framework was initially created.

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - sentiment backtest

 

In an effort to provide additional context and compliment a company’s sentiment score, we also focus on insider transactions in conjunction with shifts in buy/sell side sentiment to gauge the overall conviction on a particular name. For additional detail on the methodology behind our proprietary sentiment measures or historical detail for a specific company, please contact the team. Below, we have included FL as an example as well as the historical trends in sentiment by retail subsector.

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - FL sentiment 2.27.12

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - Discount Stores sentiment

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - apparel retail sentiment

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - apparel lowmid tier sentiment

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - apparel upper tier sentiment

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - department sentiment

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - Footwear Sentiment

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - sporting goods

 

Retail Sentiment: WMT, HBI, GIL, CRI, JCP, KSS, M, LIZ  - other