Summary
- Traders are focusing on retail names this week, with a myriad of key earnings on tap.
- I see the group as priced right when analyzing the XRT ETF.
- With a bullish chart and sanguine seasonals, I outline a long play.
Retail is in focus this week, with a slew of big names reporting Q4 results to round out the season. So far, according to Bespoke Invest, among 420 S&P 500 companies reporting, there's about a two-to-one ratio in negative outlooks versus positive forward guidance numbers. That is a heck of a lot of bearishness as recession chatter continues.
The consensus right now is that Q1 will be solidly in the black with respect to U.S. real GDP growth while Q2 and Q3 are seen as being contractionary quarters.
Technical Recession Expected
Goldman Sachs
With a dire growth outlook ahead, it would seem retail would be a tough spot to be invested in. Let's dive into a popular ETF in the space. According to the issuer , the SPDR S&P Retail ETF ( XRT ) seeks to provide exposure to the retail segment of the S&P total market index, which comprises the following sub-industries: Apparel Retail, Automotive Retail, Computer & Electronic Retail, Department Stores, Drug Retail, Food Retailers, General Merchandise Stores, Hypermarkets & Super Centers, Internet & Direct Marketing Retail, and Specialty Stores.
With a reasonable 0.35% annual expense ratio and a median 30-day bid/ask spread of just a single basis point, cost and tradeability are strong on this $422 million AUM fund. Volume is more than 1.5 million shares on average, too. With a 2006 inception, the fund is a long track record of close index tracking and the long-term earnings growth rate is more than 7% according to Morningstar .
SSGA lists the price-to-book ratio at 2.4, on average, across XRT 94 holdings. The forward price-to-earnings ratio is very cheap at just 11.7 while Morningstar lists the P/E at 11.5. The dividend yield is merely about what the market pays, near 1.7%. Finally, being an equal-weight product, the weighted average market cap is still somewhat high at $27.4 billion.
Digging into the portfolio, XRT is a small-cap value ETF on the Style Box, so paying attention to how the Russell 2000 performs can give color to price action on XRT. Notice below that the factor profile puts XRT as an extreme value fund with exceptionally low momentum and quality while volatility is high.
XRT Portfolio & Factor Profile
79% of XRT is in consumer cyclicals while 15% is in consumer defensives. Overall, 14% of the ETF's portfolio is in the top 10 holdings, so it's quite diversified, but auto retail, apparel, and specialty stores make up about 60% of the fund.
Auto & Apparel Heavy in XRT
SSGA
Seasonally, data from Equity Clock, show that early March is a favorable time to get long XRT, then taking profits at the end of April can be a wise play.
XRT Bullish Seasonal Trends
The Technical Take
With a cheap valuation and bullish trends on the calendar about to take shape, does the chart support the bullish thesis? I think so. Notice in the graph below that shares are putting in a bullish rounded bottom feature. I would like to see XRT rally above key resistance at $76, but we should see some buyers step in around $64 where the now flat 200-day moving average comes into play - the fund met selling there in August and December before rallying above it in January.
Finally, there is a high amount of volume by price in the low $60 up to $68 that should cushion much further downside off the February spike high. Long here with a stop under $60 looks good to me, targeting $75 first. A move above $76 would project a rally toward $95.
XRT: Bearish to Bullish Reversal, Resistance $76
The Bottom Line
I like XRT here on valuation and based on the charts. Bullish seasonality is a boon, and the ETF has a reasonable expense ratio with strong liquidity.
For further details see:
XRT: Retail Stocks Look Cheap With Seasonal Tailwinds And A Bullish Chart