Daily Gains Letter

Online Retailers Holding Up, but Are They Worth the Investment Risk?

By for Daily Gains Letter |

Online Retailers Holding Up, but Are They Worth the Investment Risk?Earnings season is in full swing, and it’s looking like the retail/merchandising sectors are doing relatively well. The data support the case that consumers are spending again; whether this is sustainable or not is another matter, but for the first quarter, it looks like consumers have opened up their wallets.

One company that really surprised to the upside was Overstock.com, Inc. (NASDAQ/OSTK). On the stock market, the company’s been in the doldrums for years, but its current numbers certainly show renewed momentum in its operations.

According to the company, its 2013 first-quarter sales grew 19% to $312 million, direct revenues grew modestly to $41.9 million, and fulfillment partner revenues shot up to $270 million from $221 million in the comparable quarter last year.

Earnings grew significantly to $7.7 million, up from $2.7 million year-over-year. Diluted earnings per share were $0.32, compared to $0.12 in the first quarter of 2012.

eBay Inc. (NASDAQ/EBAY) slightly disappointed the marketplace by reporting revenues that came in just a hair below consensus. The company’s earnings were still very solid, but it reduced its earnings outlook range for the second quarter of 2013, causing investors to sell the stock.

Amazon.com, Inc. (NASDAQ/AMZN) is the big kahuna in the online retail space. The company reports its first-quarter earnings tomorrow; the Street expects adjusted earnings of approximately $0.09 per share, with average revenues of $16.18 billion.

On the stock market, Amazon has had a tremendous run since March 2009. The company’s share price is up fivefold on the stock market since then and is very much due for a break.

The one thing that Amazon keeps doing, despite its current success, is reinvesting in its business. This is why the company’s earnings are expected to be down in the first quarter—with this company, the top line really is number one.

The numbers vary so far, but Thomson Reuters expects S&P 500 earnings to grow 2.2% in the first quarter, with anemic revenue growth of approximately 0.7%. So far, I’d say that these expectations are holding true. We’ve certainly seen corporations do a great job, once again, maintaining their earnings in this slow-growth environment—with particularly weak contributions from Europe, revenues have been coming in light.

Most corporations are weighting their earnings growth to the bottom half of the year, which is not unusual. I view the stock market as being able to maintain its current gains at the end of the year. Without question, a major stock market correction is warranted, not so much in terms of valuations being stretched, but simply because this recovery stock market has been running for four years straight.

The one thing that we can’t forget about—even though corporations are basically reporting as expected—is investment risk in the stock market from outside sources. The sovereign debt crisis in Europe is unresolved and remains the single greatest threat to your portfolio this year.

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