1Q Breakout Candidates: Signet Jewelers Ltd., Nordstrom, Inc., and Ross Stores, Inc.

Retail stocks SIG, JWN, and ROST could be on the verge of another first-quarter breakout

Dec 30, 2016 at 10:32 AM
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With 2017 just around the corner, we recently took a look at the best stocks to own in January. Today, we'll expand our scope to examine the top stocks on the S&P 500 Index (SPX) for the entire first quarter. Three names we'll study in-depth are retailers Signet Jewelers Ltd. (NYSE:SIG), Nordstrom, Inc. (NYSE:JWN), and Ross Stores, Inc. (NASDAQ:ROST).

Before diving into the specifics, here's a quick look at the 25 best SPX stocks in the first quarter, based on returns from the past decade. The chart comes courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.

best 1q spx stocks dec 30

Signet Jewelers Ltd. (NYSE:SIG)

SIG has been positive in each of the past 10 first quarters, with an average three-month gain of 16.6% -- making it the best stock on our list. Frankly, shareholders would kill for a repeat performance, as 2016 has been brutal for the shares. The jewelry retailer currently sits on a year-to-date loss of 24.2%, last seen trading at $93.72.

If SIG can pull off another stellar first quarter, there's plenty of proverbial fuel for the fire, from a contrarian perspective. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), pessimism is running high, with 4.65 puts bought to open for every call over the last two weeks -- albeit amid relatively low absolute volume -- a ratio that ranks in the 89th annual percentile. Not to mention, 16.3% of Signet Jewelers Ltd.'s float is sold short. In other words, an unwinding of bearish put positions and/or a short-squeeze situation could bolster any gains on the retail stock.

Nordstrom, Inc. (NYSE:JWN)

JWN has also been a strong first-quarter performer over the past 10 years, up 90% of the time -- with an average three-month advance of 6.9%. If history is to repeat itself, the stock will need to reverse its current negative momentum. At $48.01, the shares have fallen hard since their December highs near $62.

From a contrarian perspective, Nordstrom, Inc. has an opportunity to run higher on potential upgrades and short covering. After all, 13 of 19 analysts have handed out a "hold" or worse recommendation. Plus, over 21% of the stock's float is sold short, which translates into eight sessions' worth of pent-up buying power, at JWN's average trading rate.

Ross Stores, Inc. (NASDAQ:ROST)

Finally, discount retail stock ROST has put in some strong first quarters over the last 10 years. The shares have finished the three-month period higher 90% of the time, and sport an average gain of 14.2% over that span. Another first-quarter breakout would be a continuation of the stock's monster run in 2016, with ROST up 22.2% year-to-date at $65.80.

In terms of contrarian potential, it's worth noting the near-extreme preference for short-term puts over calls observed in the options pits. Specifically, Ross Stores, Inc. sports a Schaeffer's put/call open interest ratio (SOIR) of 1.52 -- just 9 percentage points from a 52-week peak. An exodus among option bears could contribute to tailwinds.

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