Once upon a time, investors in retail stocks counted cars in parking lots, measured mall foot traffic and kept an eye out for discounts to keep track of what the marketplace really looked like. In the era of digital, that behavior has given way to buying data on credit and debit card transactions to keep tabs on how retailers are really doing day in and day out.
That credit card data may be distorting the price of retail stocks — and making them oddly volatile.
Take for example Tailored Brands — owners of Men's Wearhouse and Jos. A Bank — and its adventures with its short sellers acting on data supplied by firms like Earnest Research that showed card receipts underperforming widely. Earnest Research is a credit and debit data firm that sells information to hedge funds and other large scale investors.
Because the credit card data showed underperformance, short sellers jumped on board. When earnings came back showing mixed results – but with some stores' sales growth on the rise – stocks shot up 40 percent overnight.
Firms like Earnest, 1010data and Second Measure pull their data from companies like Yodlee (a division of Envestnet). Yodlee's main business is personal financial tools for banks and FIs, but it has a sideline in data sales. Specifically, it offers anonymized user data gathered from its credit and debit card transactions to hedge funds and firms like Earnest.
Earnest then combines various data streams it receives, crunches the numbers and sells its results to big institutional investors. When they get it right, investors make money. When they are less right, stock prices tend to bounce around rather dramatically as short-sellers rush to cover their bets.
This reality has made retail stocks a good deal more volatile than average over the last 18 months. As of June of 2015, retail stocks were 1.2 times more volatile than the S&P 500. Today it is 1.5 times as volatile, according to FactSet data.
The presence of credit card data in investors' hands isn't the whole reason — retailers are also dealing with the environments of digital transformation's progress — but some experts think it is at least playing a role.
And, recent reports indicate that the influence of the data is echoing past the walls of traditional retail. An October 5 note from Earnest on Netflix's paid domestic subscriber streaming figures indicated that consensus figures were too high. Leading up to the earnings reports, short sellers jumped on board and then sent stock prices up 19 percent overnight when Netflix beat those "too hight" predictions.
So what is the lesson? Data can help investors make decisions — but as of yet, it is not a fully functional crystal ball. The best minds have spent some time trying to predict earnings before the official figures hit — history so far indicates that failure is more likely than success.
But for retailers already swimming in choppy waters, the bouncy share price is yet another element of uncertainty when exactly none were needed.