Can These 2 Struggling Retailers Turn Things Around In 2016?

Gap Inc (NYSE:GPS) and Macy's, Inc. (NYSE:M) have had horrible years, but one could be looking at a solid start to 2016

by Josh Selway

Published on Dec 29, 2015 at 2:18 PM
Updated on Jun 24, 2020 at 10:16 AM

While outperforming stocks like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) will be sad to see 2015 go, others can't get to 2016 fast enough. Two names that have had a particularly miserable year are Gap Inc (NYSE:GPS) and Macy's, Inc. (NYSE:M). Let's take a closer look at these retail stocks to see if they may be in store for a short-term boost to kick off the new year. 

GPS is up 2.7% today at $25.79. Longer term, though, the shares have struggled mightily, giving back 38.8% in 2015. Moreover, the retail stock has succumbed to overhead pressure from its 40-day moving average on several occasions since April, and hit a three-year low of $24.55 on Dec. 18. 

If GPS can find firm footing, however, it could be positioned well for short-term gains, from a contrarian viewpoint. For starters, short sellers have been piling on recently, with short interest surging by almost 30% over the past two reporting periods. The 35.5 million GPS shares now controlled by short sellers account for six days' worth of buying power, if we go by normal daily volumes. 

In the options arena, traders have been extremely put-heavy for some time. GPS' 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio comes in at 3.39. Not only does this indicate that more than three puts have been bought to open for every call, but it also outranks 83% of all similar marks from the past year, hinting at an unusual preference for puts over calls. 

Even analysts have been overwhelmingly bearish. Twenty-two brokerage firms track the retail stock, but only two rate it anything better than a "hold." Adding to this point, Gap Inc's (NYSE:GPS) average 12-month price target sits right overhead at $27.19. When taking all of this into consideration, there's plenty of areas where pessimism could unravel, possibly leading to a GPS rally. 

As for M, the shares are off 0.1% today at $35.45, but that's nothing new. The stock has been falling precipitously since its all-time high of $73.61 in mid-July, shedding over half its value. 

Unfortunately for M's shareholders, there's not really a bullish case to be made for the stock. Despite its epic decline, short sellers have remained largely absent. In fact, short interest fell by 13.5% over the two most recent reporting periods. Currently, there's only about one day's worth of sideline cash available for M, certainly not enough to hold out hope for any type of short-squeeze situation. 

More concerning is the extremely call-biased positioning of options traders. Looking at data from the ISE, CBOE, and PHLX, M's 10-day call/put volume ratio of 3.67 is just 14 percentage points from an annual peak. Echoing this is the retail stock's Schaeffer's put/call open interest ratio (SOIR). At 0.58, this reading not only informs us that call open interest heavily outweighs put open interest among options set expire within three months, but it also lands below three-quarters of the past year's readings. In short, near-term options traders are way more call-skewed than normal. 

There's even room on analysts' bearish wagon. Specifically, only two of the 14 brokerages with coverage on Macy's, Inc. (NYSE:M) recommend selling it. All said, it appears M could be in danger of adding to its losing streak as we enter 2016, if some of these bullish holdouts hit the exits. In separate news, the retail chain had to recall roughly 121,000 Martha Stewart cookware sets over safety concerns. 

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