Bull Market Leaders in Gutter as Bears Maraud U.S. Chain Stores

May 09, 2014 11:47 am ET

(For more Market Insights columns, see NI MKTINSIGHT)

May 9 (Bloomberg) -- The U.S. stock market right now is sort of like the Los Angeles Clippers: in desperate need of new leadership.

For the five-year bull run that nearly tripled the S&P 500, investors viewed shares of chain stores and other companies that relied on our spare cash as the best thing since yoga pants. These days, they’re about as fashionable as a pair of parachute pants from Chess King.

Step up to the check-out line to view the receipts for this dramatic reversal of fortunes. Retailers in the Standard & Poor’s 500 Index jumped 311 percent from the bottom of the bear market in 2009 through the end of last year. Among 24 groups, the only ones to beat them were the companies that make the clothes and assorted bric-a-brac they sell, the media companies that advertise them and the companies selling us cars so we can drive to the mall.

And what has happened since? Retailers are down 11 percent so far this year, the biggest loss among the 24 groups. Hot on their heels are those same automobile and consumer-durable and apparel companies.

Even after the fire sale, shopping for bargains in this space isn’t easy. At 23.6 times trailing earnings, they’re the second-most expensive in the group of 24 industries.

Web Froth

To be sure, blame for much of the frothiness can be placed on companies outside the mall. Excluding the most-richly valued retailers in the S&P 500 -- Amazon.com Inc., Netflix Inc. and TripAdvisor Inc. -- leaves the group with an average P/E of 18.5 on a trailing basis and 15.8 looking forward.

All of this brings us to the big news among the mall rats today: Gap Inc.’s better-than-estimated earnings. The stock is rallying this morning, enough to solidly put it in the green for the year, as an unexpected gain in April sales highlighted the “Easter shift” that benefited retailers with fiscal first quarters that ended last month.

However, so far the stock is not casting much of a glow over the entire retail sector. The S&P 500 Retailing Index of 31 companies is little changed today.

If the plunge in chain stores continues, investors in that space may be better off with real parachutes, not just parachute pants.