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Even As The Retail Sector Falters, This Trader Says 1 Stock In The Group Could Still Head Higher

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1 stock in the retail sector looks poised to break higher.

The retail sector cooled a bit this week after hitting its highest level in two years last week.

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Big names in the sector got hit with rating downgrades this week including Target (NYSE: TGT), and Victoria’s Secret parent L Brands (NYSE: LB). 

MKM Partners issued the only Sell rating on the Street for Target shares, citing risks to the big box chain including “deteriorating customer satisfaction,” “heavy overlap with Walmart (NYSE: WMT),” and “foot traffic underperformance.”

Then Citi analysts downgraded L Brands to Sell after the retailer cut 15% of its corporate workforce amid falling sales for its Victoria’s Secret brand.

“Most retailers are focusing on two things,” said John Petrides, portfolio manager at Tocqueville Asset Management. “One, making sure they have enough liquidity to ride out a fearful consumer for the next six months to a year, possibly, and also how do they grow and build their presence in the e-commerce world, because e-commerce is here to stay?”

“Whatever trend we were moving into—more e-commerce sales in the retail space—has been multiplied by x factor because of COVID and [the] stay-at-home” trend, Petrides added. “It’s a really tough world for retailers out there, and they have to find ways to reinvent themselves and to put as much excess capital as they can into building out their e-commerce channels.”

Miller Tabak’s Matt Maley said the retail sector’s biggest headwinds right now are concerns over the strength of the consumer amid the pandemic and subsequent recession and the possible extension of enhance unemployment benefits in the next coronavirus relief bill currently being negotiated.

White House and congressional Democratic negotiators have been working toward coming to agreement on the next relief bill this week. While the two sides have made some progress toward a deal, they remain divided on a few key issues, including the level of unemployment benefits to extend with Democrats seeking to maintain the addition $600 per week payments, and Republicans arguing for a reduced payment.

“When we have this new unemployment benefit come up, it is going to pass, but if it’s not the full $600—even if it’s $500—that’s a fairly significant decline on their weekly pay,” Maley said. “If it goes down to $400, obviously that’s lower by a third. That’s going to have an impact.”

“The other thing is the coronavirus,” Maley continued. “If we get a second wave here in the fall or a third wave in the fall and winter in the U.S. and Europe, that’s going to cause another big problem for the retailers.”

But even with these risks, Maley said there’s one stock in the retail sector that looks like it could still head higher.

“Target, if you look at the chart, looks pretty good,” Maley said. “It’s formed an ascending triangle pattern. It’s up at the top end of that pattern. And if it can break above $125.50, that’s going to be very, very bullish for this stock.”

Source: TradingView.

Target shares have successfully broken above the $125.50 level, closing Thursday at $129.01.

But Maley cautioned that should the stock fall below its 50-day moving average, MKM’s Sell call may prove the right move.

“If it breaks below the lower end at its 50-day moving average—that’d be the $120 level—that’ll be negative for the stock,” Maley said. “But right now, the stock looks pretty good. … This is one player that actually might do quite well.”

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