Would you pay 32x forward earnings for a retailer?
Amazingly, this is the valuation other “investors” have put on the top 5 holdings in the S&P retailer fund. S&A’s Frank Curzio writes:
The top five holdings in the S&P retailer fund are trading at an average forward price-to-earnings ratio of 32. That’s more than twice as high as the average P/E ratio for companies in the S&P 500. In other words, most retail stocks are priced for perfection.
We saw what happens to expensive companies that miss earnings estimates. Cloud-computing company F5 Networks plunged 30% after missing earnings estimates. Networking giant Cisco dropped 15% after reporting earnings. I think we’ll see similar pullbacks in retail stocks when they report earnings next quarter.
He cites the highest cotton prices since the Civil War (!) – along with FedEx’s recent earnings outlook bomb, as fundamental reasons retailers could come under pressure. And if they do, they sure appear to have a loooooong way to fall.