Identifying Sector Weakness: Sears Holdings and Department Stores

On Tuesday morning, Sears Holdings Corporation (SHLD@SHLD | Quote | Chart | News | PowerRating) warned that the company's Q2 earnings could fall to as much as half of last year's numbers. The company said that its retail stores were struggling to stay "relevant" to its target consumers.

When a major company publicly warns of trouble during the present quarter, the entire industry usually suffers as well. SHLD is a component of the Department Stores industry, which has a PowerRating (for Industries) of just 2. From 1996-2006 industries with a PowerRating (for Industries) of 2 have achieved annualized returns of 5.97% based on 3-month historical returns. By contrast, industries with a PowerRating of 10 have an annualized return of 35.27% based on 3-month historical returns. Clearly, the historical edge is working against the entire industry in this case.

In this situation, we have an individual stock within a weak industry that has just publicly announced that the next earnings results will not be as rosy as once expected. This would be a good time to "red flag" this entire industry, and to put these stocks aside and look for better opportunities. Individually, some of the department store companies have high PowerRatings (for Investors), but it always helps to take advantage of what other PowerRatings indicators are pointing to (overall industry weakness).

Here's a breakdown of some individual department stores, and how they have performed so far this year.