In this article, we discuss Michael Burry’s latest warning on the bullwhip effect and 10 retail stocks to watch.
Michael Burry, the legendary investor of The Big Short fame and head of Scion Asset Management, recently took to social networking platform Twitter and claimed, in a since deleted tweet, that the Federal Reserve could reverse course on a series of planned interest rate hikes later this year. The claims are startling since the bulk of the coverage on the economy so far this year has focused on the efforts of the central bank to curb record inflation through a series of rate hikes. All major indexes of the market are trading down due in part to tightening policies.
In May, the Fed voted for a 0.5% increase in interest rates. The following month, another 0.75% raise was improved. The increases are the largest since 2000 and are aimed at controlling the pace of inflation which has climbed to the highest it has been in nearly four decades. Burry, sharing a CNN article on the subject, identified the “bullwhip effect” as the reason behind his prediction, noting that retailers are loaded up with excess inventory that would add to deflationary pulses in the coming months and reverse planned rate hikes.
Some of the retailers that could be affected by these trends include Costco Wholesale Corporation (NASDAQ:COST), Walmart Inc. (NYSE:WMT), and Amazon.com, Inc. (NASDAQ:AMZN). The “bullwhip effect” refers to a situation where “product demand forecasts do not align with actual sales, leading to massive volatility in inventory levels and other supply chain disruptions”. Many retailers have already warned of bloated inventories and cut guidance to reflect impact of possible sales later this year to get rid of unwanted items from storage.
Our Methodology
The companies that operate in the retail sector were selected for the list. In order to provide readers with some context for their investment choices, the business fundamentals and analyst ratings for the stocks are also discussed. An extensive database of around 900 elite hedge funds tracked by Insider Monkey in the first quarter of 2022 was used to identify the popularity of each stock among hedge funds.
Photo by Franki Chamaki on Unsplash
Michael Burry’s Latest Warning on Bullwhip Effect and Retail Stocks to Watch
10. Chico’s FAS, Inc. (NYSE:CHS)
Number of Hedge Fund Holders: 16
Chico’s FAS, Inc. is a Florida-based specialty retailer. The share price of the firm has been climbing in the past few weeks on the back of a strong sales report for the first quarter of 2022. The firm beat market estimates on earnings per share and revenue by $0.18 and $50 million respectively. The comparable sales between January and March were up more than 40% year-on-year. Guidance numbers for the second quarter were also encouraging. The firm expects consolidated net sales of $550 million against estimates of $534 million.
In early March, B. Riley analyst Susan Anderson maintained a Neutral rating on Chico’s FAS, Inc. stock and lowered the price target to $5 from $6, noting the firm needed to do more to show long-term visibility on sales and margins.
At the end of the first quarter of 2022, 16 hedge funds in the database of Insider Monkey held stakes worth $122 million in Chico’s FAS, Inc., compared to 18 in the preceding quarter worth $149 million.
Just like Costco Wholesale Corporation, Walmart Inc., and Amazon.com, Inc., Chico’s FAS, Inc. is one of the retail stocks on the radar of elite investors.
Miller Value Partners, in their Q4 2021 investor letter, mentioned Chico’s FAS, Inc. (NYSE:CHS). Here is what the fund said:
“During the quarter, we had two main positive contributors, (which includes) Chico’s FAS, Inc., where both holdings were up more than 10%. Chico’s FAS, Inc is a turnaround retail investment that operates three main banners (Chicos, White House Black Market, and Soma). New CEO, Molly Langenstein, has done a wonderful job repositioning the banners and dramatically enhancing each brand’s merchandise, which has been well received in the marketplace. The company has also rolled out new digital tools that are expanding its customer base and driving greater efficiencies in the business. We see significant growth over the coming years as Chicos returns to historical revenue and margins levels, and Soma executes on their growth plans to achieve $1B in revenue. In our opinion, Chico’s FAS, Inc. share price remains mispriced and has long-term upside potential more than 3x the current price.”
9. Best Buy Co., Inc. (NYSE:BBY)
Number of Hedge Fund Holders: 25
Best Buy Co., Inc. (NYSE:BBY) retails technology products. The firm is among a handful of retailers that have avoided rattling investors with their guidance outlook for 2022 amid concerns around consumer spending. On May 24, the firm posted earnings for the first quarter, beating market estimates on earnings per share and revenue but reporting an 8.7% fall in domestic revenue due to a decline in comparable sales. The firm expects revenue to be up to $49.9 billion this year against estimates of $50 billion despite the setback.
On June 14, Bank of America analyst Elizabeth Suzuki downgraded Best Buy Co., Inc. stock to Neutral from Buy and lowered the price target to $90 from $110, noting that a pullback in consumer spending was going to affect the earnings outlook of the firm.
Among the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm AQR Capital Management is a leading shareholder in Best Buy Co., Inc., with 983,888 shares worth more than $89 million.
8. American Eagle Outfitters, Inc. (NYSE:AEO)
Number of Hedge Fund Holders: 27
American Eagle Outfitters, Inc. (NYSE:AEO) operates as a specialty retailer. Analysts at UBS expect that “macro pressures are likely to leave the stock at depressed levels for the near term, especially as sales decelerate across apparel”. However, there is increased optimism around the prices, quality, and design improvements made by the firm in the past few months that have helped raise positivity on the long-term outlook for the shares. The firm has an impressive dividend history stretching back seventeen years.
On June 17, B. Riley analyst Susan Anderson downgraded American Eagle Outfitters, Inc. stock to Neutral from Buy and lowered the price target to $13 from $22, noting that inflationary concerns were continuing to impact the consumer sector.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Select Equity Group is a leading shareholder in American Eagle Outfitters, Inc., with 21.9 million shares worth more than $368 million.
7. Tapestry, Inc. (NYSE:TPR)
Number of Hedge Fund Holders: 39
Tapestry, Inc. (NYSE:TPR) markets luxury accessories and branded lifestyle products. On May 12, the company posted earnings for the third fiscal quarter, reporting earnings per share of $0.51, beating analyst expectations by $0.10. The revenue over the period was $1.44 billion, up more than 13% compared to the revenue over the same period last year and beating analyst estimates by $10 million. The firm modified the outlook for the fiscal year to an estimated headwind of $0.25 to $0.30 due to China pressures.
On May 16, Barclays analyst Adrienne Yih maintained an Overweight rating on Tapestry, Inc. stock and lowered the price target to $39 from $53, noting that transitory headwinds in China were largely expected for the stock through 2023.
At the end of the first quarter of 2022, 39 hedge funds in the database of Insider Monkey held stakes worth $605 million in Tapestry, Inc., compared to 48 in the preceding quarter worth $827 million.
In its Q3 2021 investor letter, Ariel Investments highlighted a few stocks and Tapestry, Inc. was one of them. Here is what the fund said:
“Luxury accessory and lifestyle brand, Tapestry, Inc. was the top contributor to performance over the trailing one-year period. Revenue improvement across all three brands with a notable increase in consumer demand, particularly for the Coach business, triple-digit growth in e-commerce, and better than expected pricing, drove margins higher. Looking ahead, we expect Tapestry’s supply chain and SKU rationalization initiatives to continue to deliver margin expansion. Together, with early signs of improved receptivity for the Kate Spade brand, we believe a significant value creation opportunity lies ahead.”
6. Macy’s, Inc. (NYSE:M)
Number of Hedge Fund Holders: 42
Macy’s, Inc. operates as a retail organization that owns and runs stores, websites, and mobile applications. Despite concerns around ballooning inventories and consumer spending patterns, the company posted a strong earnings beat in the first quarter of 2022, exceeding market estimates on earnings per share and revenue by $0.25 and $20 million respectively. The guidance numbers were also encouraging, with the firm expecting sales of up to $24.7 billion against estimates of $24.53 billion.
On May 27, Citi analyst Paul Lejuez maintained a Neutral rating on Macy’s, Inc. stock and lowered the price target to $23 from $25, noting the firm was “seeing strong sales in occasion-based apparel and continued strength in luxury goods”.
Among the hedge funds being tracked by Insider Monkey, Boston-based Arrowstreet Capital is a leading shareholder in Macy’s, Inc., with 10 million shares worth more than $246 million.
Along with Costco Wholesale Corporation, Walmart Inc., and Amazon.com, Inc., Macy’s, Inc. is one of the retail stocks that hedge funds are monitoring ahead of the holiday season.
In its Q3 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Macy’s, Inc. was one of them. Here is what the fund said:
“Meanwhile, Macy’s, Inc., an omnichannel retail organization that operates stores, websites, and mobile applications under the Macy’s, Bloomingdale’s, and Bluemercury brands, also had a strong quarter (+21.5%). Macy’s, Inc. delivered strong second-quarter earnings, beating on earnings and revenue and raising guidance as the retailer continues to pay down debt and grow its digital business.”
5. Target Corporation (NYSE:TGT)
Number of Hedge Fund Holders: 50
Target Corporation (NYSE:TGT) is a general merchandise retailer. The firm recently announced that it would take “additional markdowns to remove excess inventory and cancel orders” as it seeks to create additional flexibility. However, the firm also said it would take pricing actions amid unusually high transportation and fuel costs. The firm expects the operating margin rate to fall to around 2.0% for the second quarter in light of these measures against consensus estimates of 6.5%. It hopes to have the rate up to 6% before the end of the year.
On June 10, Credit Suisse analyst Robert Moskow maintained an Outperform rating on Target Corporation stock with a price target of $180, noting the firm was focusing on “getting through the unwanted inventory resulting from consumers shifting their spending”.
Among the hedge funds being tracked by Insider Monkey, Boston-based Arrowstreet Capital is a leading shareholder in Target Corporation, with 2.5 million shares worth more than $530 million.
In its Q2 2021 investor letter, Nelson Capital Management, an asset management firm, highlighted a few stocks and Target Corporation was one of them. Here is what the fund said:
“We added Target Corporation to our consumer staples sector. Target Corporation offers a broad array of products in owned and known brand items at affordable prices. Its omni-channel fulfilment centers allow customers to receive their items via in-store pickup, curbside pickup, same-day shipping and regular shipping while simultaneously reducing operating costs. With a significantly lower valuation than peers and a unique operating strategy, Target Corporation is an attractive holding.”
4. Walmart Inc. (NYSE:WMT)
Number of Hedge Fund Holders: 60
Walmart Inc. owns and runs a chain of hypermarkets. On June 16, the company announced that it would be partnering with streaming service Roku in a first-of-a-kind partnership that would enable the retail firm to sell products directly through television streaming. The collaboration would offer streaming customers product discovery and a seamless checkout at the point of engagement. OneView, the ad platform of Roku, will oversee the development of shoppable ads in this regard.
On June 27, Goldman Sachs analyst Kate McShane maintained a Buy rating on Walmart Inc. stock and lowered the price target to $138 from $160, decreasing the earnings estimates for the firm by 2% on a lower margin outlook.
Among the hedge funds being tracked by Insider Monkey, Florida-based investment firm GQG Partners is a leading shareholder in Walmart Inc., with 15.4 million shares worth more than $2.2 billion.
3. Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 61
Costco Wholesale Corporation owns and runs membership warehouses. Wells Fargo analysts claim that the “membership trends have been excellent” for the company despite macro factors and general retail weakness. It also has the best overall renewal rates and the customers seem to be holding up well for the firm. The inventory position of the firm also seems “relatively good” and the management seems confident the firm can navigate the inflationary backdrop.
On June 2, Jefferies analyst Corey Tarlowe maintained a Buy rating on Costco Wholesale Corporation stock and increased the price target to $580 from $560, noting that data indicated the firm had an “opportunity to raise membership prices”.
At the end of the first quarter of 2022, 61 hedge funds in the database of Insider Monkey held stakes worth $5.41 billion in Costco Wholesale Corporation, up from 57 in the preceding quarter worth $5.40 billion.
In its Q4 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Costco Wholesale Corporation was one of them. Here is what the fund said:
“Portfolio gains were led by a diverse group of contributors. Also in consumer discretionary, Costco Wholesale Corporation, which operates a chain of membership-only big-box retail stores, continues to impress as it takes to share and becomes more relevant for the consumer even as the world opens up.”
2. Lowe’s Companies, Inc. (NYSE:LOW)
Number of Hedge Fund Holders: 65
Lowe’s Companies, Inc. is a home improvement retailer. On June 21, the company announced that it would be building more than 500 3D product assets in a push into the metaverse. The assets, available for free via the Open Builder platform of the company, will include lighting, patio furniture, area rugs, and kitchen and bath accessories. The firm expects consumers to soon walk through a planned home improvement setup in the metaverse to better visualize ideas.
On June 22, MKM Partners analyst David Bellinger initiated coverage of Lowe’s Companies, Inc. stock with a Neutral rating and a price target of $190, noting that “rate headwinds appear to be building” for the firm.
At the end of the first quarter of 2022, 65 hedge funds in the database of Insider Monkey held stakes worth $5.5 billion in Lowe’s Companies, Inc., compared to 72 in the preceding quarter worth $6.8 billion.
In its Q4 2021 investor letter, Pershing Square Capital Management, an asset management firm, highlighted a few stocks and Lowe’s Companies, Inc. was one of them. Here is what the fund said:
“Lowe’s Companies, Inc. is a high-quality business with significant long-term earnings growth potential
Supportive macroeconomic backdrop
-Aging housing stock, lack of new inventory, robust home equity values, and unprecedented pro project backlog
-COVID-19 causing millennials to enter the housing market
Positioned to grow EPS largely independent of market conditions
-Idiosyncratic revenue opportunities driving share gains
-Self-help initiatives catalyzing operating margin expansion
-Buybacks representing ~8% of current market capitalization planned for 2022
Multi-year business transformation with substantial earnings upside
-Margin target of 13% has substantial upside; Home Depot at ~15.3% and increasing
-Potential to generate high-teens EPS growth over the next several years.
Lowe’s Companies, Inc. continues to trade at a significantly discounted P/E multiple relative to Home Depot despite materially higher prospective EPS growth. LOW’s share price including dividends increased 63% in 2021 and has decreased 10% year-to-date in 2022.”
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders: 271
Amazon.com, Inc. is a diversified technology firm with core interests in e-commerce. On June 14, the company announced that it would begin the delivery of orders through the much-awaited PrimeAir drones later this year. Only three firms in the US presently have certification for drone deliveries. Per Amazon, the service will initially only be available in Lockeford, in California. Google and Walmart are the other two firms that are planning to compete with Amazon in this space.
On June 29, JPMorgan analyst Doug Anmuth maintained an Overweight rating on Amazon.com, Inc. stock and lowered the price target to $175 from $200, identifying “macro pressures, currency moves and company-specific dynamics” as some of the reasons behind the target decrease.
Among the hedge funds being tracked by Insider Monkey, London-based investment firm Citadel Investment Group is a leading shareholder in Amazon.com, Inc., with 4 million shares worth more than $13 billion.
In its Q1 2022 investor letter, Weitz Investment Management, an asset management firm, highlighted a few stocks and Amazon.com, Inc. was one of them. Here is what the fund said:
“Amazon.com, Inc. stock was down modestly in the quarter, but opportunistic purchases helped the position contribute positively to the Fund. Our index short positions against ETFs tracking market indexes provided helpful ballast during the first quarter drawdown but were otherwise detractors for the fiscal year. During the quarter, we covered roughly 20% of our S&P 500 short and 50% of our Nasdaq 100 short at progressively lower prices. Among our long equities, we added materially to high-conviction holdings Amazon.com, Inc..”
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This article is originally published at Insider Monkey.
