As the broader market sells off, a small group of retail and fashion is in danger of seeing their stocks trade below $5. The significance of this number is that many portfolio managers must sell any holdings that drop past this level.
“That’s definitely true,” said David Nelson, chief investment strategist at Belpointe Asset Management. “Unquestionably there are a lot of mutual funds that have that benchmark, and once they get below that they’ve got to sell. Sometimes it’s not justified, but they don’t have any choice.”
Retail stocks near the critical $5 mark include Crocs, at $8.65; Stage Stores, which was lately trading at $7.24; Elizabeth Arden, at $7.28; Ascena Retail Group, at $7.28; J.C. Penney, which is selling near $6.18; Tilly’s, at approximately $6.31; Xcel Brands at $6.00; Destination Maternity, which is at $5.92, and Iconix Brand Group, struggling to stay above $5 today.
Ron D’Vari, chief investment officer at New Oak Asset Management, said some investors might believe a stock below $5 indicates something is wrong with the company, but that is not necessarily the case. For the companies with declining stocks there are options for action. “It could be an opportunity for a stock buyback, if they have the cash available,” D’Vari said. “Instead of paying down debt, they may want to purchase shares while prices are low. Or they could potentially do a reverse split and provide an uplift.”
“I checked the volume at noon and when we see these volumes when a big move occurs, it means the sell-off isn’t coming to an end soon,” said Jon Corpina, senior managing partner at Meridian Equity Partners. However, he noted that different funds have different protocols for dealing with stocks under $5. “It’s something to keep on the radar screen.”
Corpina expects companies to take advantage of the sell-off to buy back shares. “This is one of the reasons you have these programs, to help support stocks when they are trading lower or are down like this.” He expects many companies will announce they’ve purchased shares when things calm down.
“I think back in 2008/2009, publicly listed companies learned a lot about how to manage cash as best as they could,” Corpina said. “I think when you see stocks get imploded, they’ll initiate buy backs or accelerate those programs.”