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A Coronavirus Department Store Pair Trade Idea To Mitigate Risk

Wayne Duggan

Department store stocks and other shopping mall retail stocks already struggling to compete with Amazon.com, Inc. (NASDAQ: AMZN) and other online competitors have been decimated by COVID-19 related store closures.

Past U.S. recessions created long-term buying opportunities within the department store group, but traders may need to be a bit more creative this downturn to protect their investments.

Department Store Stocks

Berna Barshay, editor and research analyst at Empire Financial Research, on Monday discussed the outlook for department store stocks and why many of them aren’t obvious buy-the-dip opportunities.

A surge in department store credit default swap sales suggests hedge funds are growing increasingly concerned than many department stores may be unable to avoid bankruptcy. Hedge funds buy CDSs as a way to either hege a long position in a stock or establish a short position in a company in financial distress.

Fighting For Survival

One stock that appears to be in particularly dire financial straits is J C Penney Company Inc (NYSE: JCP). Barshay said missed debt payments are fueling rumors that a JCPenney bankruptcy could be imminent. Barshay said struggling department stores face an additional challenge in the current environment in that liquidation sales could be difficult even in the event of a bankruptcy. If store traffic doesn’t return, bankrupt retailers will have a difficult time selling off inventory as they close stores.

At the same time, Barshay said there are potential investment opportunities among clothing retailers as well. Desperate department store pricing cuts should benefit consumers and discount clothing retailer TJX Companies Inc (NYSE: TJX), she said.

“Longer term, if it can get its stores open and get people to come to them, discount clothing retailer TJX Companies (TJX) - which owns TJ Maxx, Marshalls, and HomeGoods - stands to emerge victorious from this mess as it substantially and affordably upgrades its inventory,” Barshay said.

Benzinga's Take

To limit risk in investing in TJX, traders can consider pairing it with a short position in JCPenney, which has said it's exploring a potential reverse stock split to maintain its NYSE listing.

If it's difficult to short JCPenney trading under 30 cents per share, Macy's Inc (NYSE: M) is still trading near $6 even though Barshay reported Macy’s one-year CDS sales spiked 700% over just a two-week stretch back in March.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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Photo credit: Miosotis Jade (Own work), via Wikimedia Commons

Latest Ratings for JCP

Date Firm Action From To
Nov 2019 B. Riley FBR Maintains Neutral
Mar 2019 B. Riley FBR Maintains Neutral Neutral
Dec 2018 Citigroup Initiates Coverage On Underweight

View More Analyst Ratings for JCP
View the Latest Analyst Ratings

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