Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

MSN Delivers the Specialty Retail Bear Case- (no position yet though ANF run seems way overdone IMTO)

http://moneycentral.msn.com/content/P76850.asp
Insider selling is near record highs
Despite what the bulls think, the selling so far this year is anything but normal. Insiders at specialty retail chains dumped $341 million in stock in January and $324 million in February. History clearly shows this is a red flag. Whenever selling goes above $300 million for a quarter, specialty retail stocks are typically a lot lower a few months later.

Bulls argue that insiders are selling in all sectors across the market, so what’s the big deal? Well, it’s much worse at these retailers. The ratio of selling to buying, as tracked by Thomson Financial, stands at 231 to 1 over the past 90 days. That means for every dollar worth of stock purchased, insiders sold $231 worth. That puts specialty retailers in the top 25% of all sectors, ranked by this sell-buy ratio. At two of the most richly valued specialty retailers, Chico's FAS and Starbucks, insiders were dumping shares at considerably more than twice the average five-year rate, according to Thomson Financial. It’s the same at Aeropostale. These are compelling numbers that should make you head for the hills if you own these stocks.

Retailers face tough 'comps'
Why are insiders dumping so aggressively? One reason: Stores are coming up on some tough monthly “comps.” That’s industry jargon for sales gains at stores that have been in business for more than a year (so-called comparable stores). Here’s the problem: After hunkering down during the buildup to the invasion of Iraq a year ago, consumers went on a shopping spree once the Iraqi regime collapsed and tensions eased. That spree continued into the fall. Soon, retailers will have to beat those records set last year when the consumer bounced back. The crunch should start this summer.

Insiders know very well that their stocks will sell off if they don’t keep beating the comps. Judging by how quickly they’re selling their own shares, it looks like many of them don’t want to take any risks. “These guys are sitting there saying, ‘I know I can’t make my comps, so I am getting out of these stocks now,’” says John LaForge, a portfolio manager at First Albany Asset Management.

You might think that comps don’t matter, because many of these hot retailers are getting a lot of their growth by building new stores. You would be wrong. “Comp-store sales is a measure of the health of the store concept,” says Jonathan Mueller, a senior stock analyst with Aim Investments. “You can grow square footage for a while, but eventually it is not sustainable.”

Valuations look rich
Starbucks looks the worst, by one basic valuation measure known as the PEG ratio. To get a PEG ratio, divide the price-to-earnings ratio of a stock by its projected growth rate. With a PEG ratio of 1, a stock is considered fully valued by many investors. Starbucks has a PEG ratio of 2.2, and American Eagle has a PEG ratio of 1.5. Chico's FAS looks rich, too, even though its PEG ratio is a bit lower at 1.2. That’s because with a P/E of around 29, Chico's FAS is trading right up against its all-time high valuation of 30 times forward earnings. “The valuations of some of these really are stretched,” says Neil Hokanson, president of Hokanson Capital Management. “Starbucks and Chico's come to mind. If they have a glitch at all, they are going to get hit,” he says.

Indeed, a mere analyst downgrade of Chico's FAS by Jefferies last week -- on the grounds that it looked too expensive -- immediately shaved several points off the stock. (It dropped nearly $4 a share to $42.25 by Monday.) Jeffries isn’t the only sell-side shop starting to question the valuations on these specialty retail stocks. “To justify the current price, Chico's FAS would need to achieve margin expansion of 2.5 percentage points from its current peak level of 23.8%,” says Credit Suisse First Boston analyst Richard Baum. “While Chico's FAS management is among the best in specialty retail, we question whether they can pull off such a feat.”