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Is it still possible to find value in retail stocks?

The wider market has a tendency to dismiss the prospects of entire sectors – and in so doing creates opportunities for disciplined investors willing to dig out the good stocks taken down with the bad

18/08/2017

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

With the wider market so clearly out-of-love with the retail sector in general, it should come as no surprise that so many of its members are now flashing up as being of potential interest to value investors.

Here on The Value Perspective, we certainly anticipate spending a lot of our time over the coming months scrutinising retail stocks – both in the UK and globally – to judge if they could live up to that initial promise of value.

Not all retail is doomed

An important point to understand is that, while we not believe all ‘traditional’ retail is doomed as e-commerce conquers the world, even retailers with strong operations are finding it tough competing against Amazon and its ilk.

As such it is hard for investors to tell whether even businesses with strong margins and high returns will exist a few years from now.

Consider, for example, the difficulty of assessing what makes a retail company ‘better’ than its peers now that – apparently – some brands have lost their power.

Are, say, Guess jeans really so different from lesser-known brands that people will continue happily paying a premium price for them?

At this point in time, that is not a question to which we can even pretend to have an answer, here on The Value Perspective.

But let’s turn this question on its head.

There is still money to be made in badly performing sectors

People may say there is nothing for investors in the retail sector today but they could have said – indeed, many did say – the same thing about energy and mining companies two years ago, about banks seven years ago, about tobacco 10 years ago and so on and so forth.

In each instance, however, value investors argued there was money to be made in those sectors – and went on to prove it.

The same should hold true for the currently unloved retail sector – at least for those investors with the discipline and steel to buy when others are selling.

They'll also need the analytical skills to ensure the risk-return ratio of any stock bought is attractive and its balance sheet strong enough to allow a suitable margin of safety should things happen to get worse before they get better, which can happen a lot in value investing.

Those who follow the strategy are fond of the quote ascribed by the internet to everyone from Niccolo Machiavelli to Warren Buffett:

What the wise do in the beginning, fools do in the end.

For while value investors know there is every chance they will buy into a stock too early – and probably sell out too early as well – they also know, on average and over the long term, they should make money.

 

Further reading on retail:

Amazon: Is this the end for ‘old-school’ retailers?

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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