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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Jerry Olson who wrote (38811)	4/12/2001 9:07:12 AM
From: Jerry Olson	Respond to of 50167

Live Headline 12-Apr-01 Trader's Edge: Gap Inc (GPS) The phrase don't fight the Fed has served as a life raft to this speciality retailer. Even as investors have abandoned the company's stores, investors have stood behind Gap -- most prominent of them Warren Buffett. Recent performance by retail sector stocks suggests that fighting the Fed could prove a profitable play, and, in this case, going against Warren Buffett could save investors from making a major fashion mistake. Trading Points When seasoned investors discuss stocks that should benefit from an easing environment, one of the first groups to come to mind is the retailers. The instinctive reaction to get long the sector ahead of rate cuts drove the the Standard & Poor's Retail Index from an October 12 one-year low of 696 to more than 930 by the beginning of February. The 33% advance in the Index occurred in the face of deteriorating margins, declining earnings, and falling comparables in the sector. After several months of wishful thinking, investors finally appear to be losing hope that interest rate cuts will act as a growth driver for the industry. In fact, many investors betting that the worst is yet to come... Confidence surveys have revealed that the U.S. consumer continues to be optimistic that the Fed will engineer a soft landing. While not sure from where exactly all this optimism derives, it is clear that the nation's CEOs are far less confident that the landing will not be a turbulent one. Their decision to slash jobs in 5% to 15% increments should soon begin to weigh on consumer confidence. The end result is that the consumer will continue to rein in spending, leading to further deterioration in retail sector fundamentals. More important, we could soon begin to see investors lose patience with companies in the sector that are failing to deliver the goods. Gap certainly qualifies as a company that has succeeded at disappointing investors. Company has issued earnings warnings in each of the past three quarters. Investors walked away from the first two pre-announcements with the feeling that Gap's problems were temporary inventory and weather related issues. However, the March 1 warning on Q1 left little room for misinterpretation. Business so far has been very difficult. To date, February comparable store sales are in the negative low double-digit range and margins continue to be under pressure... if current trends continue, we could see earnings for the quarter in the range of $0.10 to $0.15. Our view of the year remains uncertain. Management guidance of $0.10 to $0.15 in earnings compared to a Wall Street consensus estimate at the time of $0.20. Gap also indicated that it expected pressure to continue into the second quarter, prompting analysts to cut their numbers for the period by 22%. Latest reduction in earnings estimates leaves Gap shares trading at a palatable p-e of 23. The stock is also attractively valued on a PEG basis (p-e divided by growth rate), trading at a 10% discount to anticipated year/year growth of 25%. Our primary areas of concern with Gap are that 1) estimates are still too optimistic given outlook for further pullback in consumer spending; 2) the stock is beginning to act as if its ready to break. We are more concerned about the latter issue than the former. Investors have proven that they are willing to ride out short term bumps in Gap shares in the name of perceived value. However, a technical breakdown in the stock could see the first round of long-term investors heading for the exits. Gap shares continue to flirt with pivotal support level in the $22.80 area. This level has been tested on more than a half dozen occasions over the past three weeks. We fear that a close below this area and secondary support of $22.25 would trigger a round of selling by more active accounts. Could also see shorts begin to lean on the stock in the event of a technical breakdown. For now, we think that the attractive valuation fit will keep investors coming back to Gap. But we doubt that we are the only ones paying close attention to the technical erosion that has been occurring in the stock over the past several weeks... Look for traders to play the $22.80 area for bounces until it fails. Once it does, likely to see the same money begin to take the other side of the trade.