The steepest equity selloff in four months added to profits for short sellers betting against one of the bull market’s biggest winners: chain stores.
Retailers in the Standard & Poor’s 500 Index (SPX) tumbled 1.8 percent yesterday, erasing a three-day advance, as Amazon.com Inc. and Best Buy Co. slipped 2.9 percent or more. About 4.4 percent of the industry’s stock has been borrowed and sold to speculate on declines, the most in 20 months, according to data compiled by Markit Ltd. and Bloomberg.
“Retailers have become vulnerable and the more adventurous investors are shorting,” Tom Mangan, who helps oversee about $5.5 billion as a money manager at James Investment Research in Xenia, Ohio, said in a phone interview. “We’ve pared back some of our holdings in retailers and taken some profits.”
Never easy, short selling has been all but impossible since equities bottomed in March 2009 as the S&P 500 staged an 185 percent advance. A gauge of stocks with the most bearish bets compiled by Goldman Sachs Group Inc. rose almost 50 percent last year, beating the market’s return by 17 percentage points.
That’s showing signs of changing in 2014, with the index down 3.9 percent through yesterday. More than 180 companies in the S&P 500 have declined so far this year, compared with fewer than 50 in 2013, according to data compiled by Bloomberg.
U.S. equities fluctuated today as data showed the economy added fewer jobs than forecast without stoking wage inflation and manufacturing expanded in July. The S&P 500 rose 0.1 percent to 1,932.52 at 10:33 a.m. in New York.
Bullish investors had the worst day since April yesterday as the Dow Jones Industrial Average slid more than 315 points, erasing its 2014 gain. Exxon Mobil Corp. and American Express Co. slid more than 3 percent, shattering calm in a market that had gone 52 straight days without a 1 percent retreat.
Equities around the world tumbled after companies from Exxon Mobil to Samsung Electronics Co. reported results that disappointed investors, Argentina defaulted and a Portuguese bank was ordered to raise capital. The S&P 500 fell 1.5 percent in July, the first drop in six months.
Short sellers have piled on bets that retailers will extend losses as deeper discounts on merchandise reinforce consumer expectations for more deals ahead of the Christmas shopping season. The industry is down 6.1 percent this year, one of only six declines among 24 groups in the S&P 500.
Stores have cut prices to clear out inventories after the cold U.S. winter hurt store traffic. Companies from Bed Bath & Beyond (BBBY) Inc. to Target Corp. (TGT), which yesterday hired a new chief executive officer, face tougher competition as more consumers turn to online shopping. The group, up almost 300 percent since the bull market began, has a price-earnings ratio higher than any other in the S&P 500 except real estate.
“Retail stocks are easy targets,” Michael Purves, chief global strategist and head of equity derivatives research at Weeden & Co. in Greenwich, Connecticut, said in a phone interview. “This trend isn’t going to reverse itself any time in the immediate future.”
Bed Bath & Beyond, which owns the Buybuy Baby and Cost Plus World Market stores in addition to its flagship chain, has dropped 21 percent this year as it lost customers to online retailers. About 14 percent of the shares have been sold short, a six-year high and up from 3.3 percent in May, data compiled by Markit and Bloomberg show.
Target has seen bearish bets jump to 6 percent of outstanding shares, from 2.4 percent in April. The stock is down 5.8 percent in 2014 as the company struggles to rebound from a hacker attack and a botched Canadian expansion.
The second-largest U.S. discount retailer hired PepsiCo Inc. executive Brian Cornell as chief executive officer and chairman yesterday.
Eric Hausman, a spokesman for Minneapolis-based Target, didn’t return a voice mail to discuss short selling. Leah Drill, a spokeswoman for Union, New Jersey-based Bed Bath & Beyond, declined to comment.
Investors are better off getting out of short bets because future losses may be limited after the industry fell so much already, according to Scott Wren, senior equity strategist at Wells Fargo Advisors LLC. A report from the Conference Board this week showed U.S. consumer confidence soared in July to the highest level in almost seven years.
“This stock market still has upside, and economic conditions will improve,” Wren said by phone from St. Louis. “You’ll be fighting a losing battle.”
Some of the favorite bets for short sellers have backfired. CarMax Inc. (KMX) has rallied 3.8 percent this year, with most of the gains coming in the past two months after it reported higher-than-estimated profit. Bearish investors had piled into the stock, boosting short sales to 8.2 percent from 2.6 percent in January.
Michelle Ellwood, a spokeswoman for Richmond, Virginia-based CarMax, declined to comment on the shares.
There are still pockets of weakness in the job market that are holding back consumer spending, according to Patricia Edwards, managing director of investments at the Private Client Reserve of U.S. Bank Wealth Management, which oversees $124 billion.
While the U.S. unemployment rate is near a six-year low, other measures including underemployment and participation rates haven’t returned to pre-recession levels. The share of long-term unemployed remains more than twice the historical average of 15.1 percent in data going back to 1948.
“You’re seeing people make harder choices about where they spend their money,” Edwards said in a phone interview from Seattle.
Retailers in the S&P 500 trade at 24 times earnings, 15 percent more than the five-year average. The industry will increase earnings by 7.9 percent in 2014, a slower pace than the overall market, analyst estimates compiled by Bloomberg show.
Consumer-discretionary stocks in the index have an average of 3 percent of shares sold short, the second-highest level among the 10 main industries. Telephone shares, a group of only five companies, has more bearish wagers.
“Hedge funds have to short something,” Brian Barish, president of Denver-based Cambiar Investors LLC, which oversees about $11 billion, said in a phone interview. “They roam around and look for situations where they feel there are unconstructive outlooks. We’re seeing a resetting of multiples in consumer discretionary this year.”