I just published a must-see video where I run down 50 stocks – what you should buy, what to sell, and, the best part, exactly how to do it with less than 500 bucks.
You can check that out here, but the retail story is so big, and so many financial media outlets have it so wrong, that I wanted to put these picks front and center today.
We're in the third quarter of 2020, and we've already seen 43 bankruptcy filings – just five fewer than in 2010, which was the Great Recession's worst year for retailers.
So, with four months left in the year, we're well on pace to see records broken. It's not unrealistic to talk about bankruptcies hitting the hundreds.
Now, turn on your television, and you'll hear all about how it's the U.S. consumer driving this – and that's not necessarily wrong, but what few realize is the problem goes deeper than that.
The Apparel Segment Is "Patient Zero"
Shelter-in-place orders shuttered stores for weeks – in some parts of the country, for months. Almost immediately, consumers' spending habits changed.
Millions of Americans, many of whom faced pay cuts and job losses, stopped buying apparel; they weren't going anywhere, and if they were working, they were working from home.
Clothing retailers were already reeling from the "casualization" of the nation's workforce and the exploding "athleisure" trend.
This has caused a kind of negative feedback loop that's got huge chunks of the retail chain caught up in it.
Anyone can see how tough times are for retailers, but what's harder to see is what's happening to their vendors. They're facing catastrophic losses.
With revenue cratering, retailers furloughed or fired employees (who cut back on their own spending), and tapped lines of credit. Rent was put into abeyance or skipped altogether. Crucial to this story, they "stretched" their vendor payment terms.
Some big retailers, like Macy's Inc. (NYSE: M), canceled purchase orders outright… to the tune of billions. Vendors and manufacturers across the United States, India, Bangladesh, Vietnam, China – the list goes on – went into immediate shock.
One supplier who spoke to Retail Dive said, "Every retailer and their brother was picking up the phone wanting to cancel" orders after store closures. "Products tied to canceled orders were everywhere along the supply chain: in warehouses, ports, on the water, on trucks on their way to retailers," reported Retail Dive.
As I mentioned, vendors' liquidity and cash flow positions are being decimated by retailer demands for longer payment terms.
See, just because a retailer gets cash when a customer makes a purchase doesn't mean vendors get paid.
There's a Hidden Liquidity Crisis
Along with the cancelations, retailers on 30-day payment terms are now asking for 90-day terms. Those on 90-day terms are asking for 180 days – six months. Some who already were late on payments are asking to have until next year and then to pay in installments.
And if waiting months to get paid isn't tough enough, retailers are demanding discounts and deals from vendors, which squeezes vendors' margins.
Bottom line: Many of them aren't going to make it.
Members of the American Apparel & Footwear Association that represents retail vendors and suppliers said, "We're in the middle of this liquidity crisis. We're very worried about whether we can even stay in business."
The problem for suppliers is whether and how to insure future shipments against default losses as stores cancel orders, open and close, and potentially end up in bankruptcy.
Economists from consulting firm Econ One estimate – "conservatively" – that shortfalls in trade credit insurance could inhibit supplier output to the tune of a staggering $46 billion. That could impact hiring of 155,000 workers at those firms that rely on trade credit insurance.
"There is a real danger that this snowballs out of control, halting the supply of goods, driving up costs, and even leading to empty shelves at the very time retailers have begun to reopen physical stores and customers have started to return," GlobalData apparel analyst Leonie Barrie said in a June press release.
It's already happening.
Here's Where the Customer Comes (Back) In
As the country reopens, for better or worse, to a greater or lesser degree, for at least some in-person commerce, some shelves have been conspicuously empty.
New orders, tens of millions of dollars' worth of back-to-school apparel, now in the pipeline, are being canceled as retailers hedge against schools not reopening and demand disappearing.
Vendors, who as we've seen are already on the ropes or on their knees, are going to be left holding the bag.
That's likely to be the last straw for some… even as they're being asked to ship holiday goods.
They may not be able to.
Stores, if they are physically open for the holidays, may not have merchandise.
Consumers facing empty shelves won't be buying, and the negative feedback loop will have consumed itself, ending abruptly for vendors and retailers.
Buy This, Not That
So the environment is chaotic and volatile, to say the least.
When you factor in the huge groups of new investors flooding into the market thanks to commission-free mobile trading, there's the potential for perceptions to be skewed. People can think to themselves, "Ooh, a beaten-down retailer on sale."
At times like these, it's shockingly easy for bubbles to form in stocks that are perceived as being cheap bargains when, in reality, they're potential death traps. Remember, sometimes cheap is cheap for a good reason.
With that said, steer well clear of these names:
- Capri Holdings Ltd. (NYSE: CPRI)
- Express Inc. (NYSE: EXPR)
- Tapestry Inc. (NYSE: TPR)
- Macy's Inc. (NYSE: M)
And, like I say in my video here, buy-buy-buy adaptable, favorably positioned performers like these…
- Lululemon Athletica Inc. (NASDAQ: LULU)
- Nike Inc. (NYSE: NKE)
- TJX Cos. Inc. (NYSE: TJX)
- Ross Stores Inc. (NASDAQGS: ROST)
There's Massive Potential in Stocks Right Now
That's just what's happening in retail right now. The fact is, times like this can create incredible opportunity – if you know what to buy.
That's why I want everyone to check out my FULL list of 50 stocks. It's kind of a "lighting round" of the best (and worst) stocks. It covers just about everything: retail, tech, real estate, medicine, and much more.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.