Advertisement

Short Wayfair: home furniture won’t deliver

Online furniture retailer Wayfair is chronically unprofitable and faces too much competition, says Matthew Partridge.

Lorraine Kelly on a settee
Home furniture is a very difficult market to make money in

Online furniture retailer Wayfair is chronically unprofitable and faces too much competition.

One of the most volatile stocks over the past 18 months has been the American online retailer Wayfair (NYSE: W). It nearly tripled from $66 in April 2018, reaching a peak of $171 in March. However, since then the stock has tumbled to $105, a drop of around 40% from its spring peak. It's easy to see why the market used to be so enthusiastic about the group. It has been growing so quickly that sales are expected to be over ten times higher this year than in 2013.

Wayfair suffers from poor profitability

Wayfair's losses aren't particularly surprising when you consider that its main business is selling home furniture, a difficult market to make money from consistently.

Advertisement - Article continues below

Consumers tend to spend a long time shopping around for the best deal before committing to a purchase and a large percentage of goods tend to be returned. What's more, Wayfair is far from the only company in this rather crowded market. Not only does it face competition from the established "big box" physical retailers such as The Home Depot and Bed Bath and Beyond, which are still a force in US retail, but it also has to find a way to fend off online competition from Amazon.

Advertisement
Advertisement - Article continues below

In addition to facing strong competition, Wayfair is vulnerable to any economic turbulence in the US in the near future. As you'd expect, there is a strong historical link between home furniture and housing sales, so if the American housing market starts to stumble then demand for home furnishings could fall. Both house sales and prices are still increasing, but the rate of growth has slowed considerably, and surveys suggest that consumers and homebuyers are increasingly worried about what's going to happen over the next year. Nobel laureate Robert Shiller expects prices to start falling.

Advertisement - Article continues below

The upshot is that while Wayfair's shares have fallen a lot, I think that they will continue to decline. I suggest that you short it at the current price of $105, at £33 per $1 (compared with IG Index's minimum price of £9 per $1), covering your position if Wayfair rises above $135. This gives you a total downside of £990.

How my tips have fared

Bausch Health Companies has increased from $20.59 to $20.91. Volkswagen has also moved up, from €153 to €163, while International Consolidated Airline Group has climbed too, from 468p to 502p.

Sadly, however, Bellway has dropped from 3,354p to 3,291p and Ted Baker has collapsed from 925p to 494p, triggering the stop-loss at 709p. Overall, my long tips are making a profit of £2,358, down from £2,856.

My short tips have also had mixed results. While there hasn't been a dramatic Ted Baker-style reversal, three out of the five tips have appreciated. Tesla went up from $241 to $257, Netflix also increased from $266 to $286 and Uber advanced from $29.64 to $31.12.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Meanwhile, Weis Markets fell from $38.32 to $36.02, while bitcoin decreased from $8,331 to $8,321. This meant that the total profits that my short tips are making fell from $1,953 two weeks ago to $1,786 now. Still, at least all five of my short tips are still in the black. As well as being forced to close my Ted Baker tip, I recommend closing the open position on Superdry since it is still losing money six months after I recommended it in April (Issue 943).

This means that henceforth the number of long and short tips will be equal at six each. This also means that my remaining tips are making a profit of £5,511, while the losses on my closed tips have gone up to £6,356.

Over the next few months I'm going to make it a rule to close any position that I've held for longer than a year, unless there are really exceptional circumstances.

Trading techniques... Following the Fed

In reality, the relationship, especially in the short run, isn't as clear as you'd expect. For one thing, a cut or a hike might already have been anticipated by the market and therefore priced in. Also, a cut in rates might indicate that the central bank is worried that the economy is starting to weaken, while a hike might be seen as a vote of confidence.

Advertisement - Article continues below

Research by Mark DeCambre of Marketwatch suggests that in the short run the bigger the Federal Reserve cut the better the return on stocks. Since 1990, the American stockmarket has on average gained 0.16% the day of a 0.25% cut, 0.34% the day of a 50% cut and 2.76% the day of a 75% one. However, over longer periods smaller cuts are positive, while bigger cuts may be negative. For example, three months after a 0.25% cut the stockmarket was up an average of 3.67%, but down 1.36% after a 0.5% reduction. And three months after a 0.75% cut the market was down a whopping 3.97% on average.

The stockmarket generally responds better when the cuts have come after a series of hikes. LPL Financial found that after five of seven of these occasions, the market was higher six months later with an average return of 7.5% (equivalent to an annualised return of 15.6%). However, it's important to note that in the two most recent cases, in 2001 and 2007, following this theory would have lost you money as the stockmarket was down by 9.5% and 14.6% respectively six months after the Fed started cutting.

Advertisement
Advertisement

Recommended

Visit/trading/600685/trading-catch-this-coach-company
Trading

Trading: catch this coach company

Bus and coach operator National Express has expanded into promising markets abroad – and it looks cheap
28 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600641/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020
Visit/519913/share-tips-8-stocks-for-robust-returns
Share tips

Share tips: eight stocks that should deliver robust returns

Ryan Ermey of US publication Kiplinger’s Personal Finance chooses his favourite stocks for the next decade, which should be able to grow for years.
28 Dec 2019
Visit/519724/share-tips-of-the-week-166
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 Dec 2019

Most Popular

Visit/investments/property/601606/house-prices-crash-uk-property-prices-falling-where-next
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
Visit/economy/inflation/601584/the-end-of-the-bond-bull-market-and-the-return-of-inflation
Inflation

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020
Visit/investments/stockmarkets/601611/nasdaq-all-time-high-markets-and-the-real-economy
Stockmarkets

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020