We are coming to the end of the holiday season and the end of 2014, which for many means it is time to rebalance portfolios and think about updating stock holdings. My advice is to buy what’s unloved.
If aliens from another planet read our financial media, they might well come away thinking the only retail is online retail, and that traditional brick and mortar businesses are a dying relic from some bygone era (and if Amazon.com Inc. (AMZN) is any guide, they also would come away thinking that investors don’t require their holdings to earn a return, but that’s a discussion for another day).
In 2014, analysts couldn’t run away fast enough from brick and mortar retail names like Best Buy (BBY), Coach Inc. (COH), Gap Inc. (GPS), or Williams-Sonoma Inc. (WSM), leaving behind share prices that fell by as much as 40%. It wasn’t just that these stocks seemed to fall off a cliff at even the slightest hint of bad news. Traditional retailers were just as likely to fall after beating their quarterly earnings and revenue expectations. Like the wares they sell, these companies had gone out of style with Wall Street’s arbiters of fashion (it turns out that the devil wears Prada, after all).
Online Gets the Headlines, but Brick and Mortar Still Get the Sales
Yes, online retailing and same-day delivery via robot drones makes for good copy, but equity investors would be well served to take another look at this unloved segment. A recent report from eMarketer.com highlights that online retail is growing twice as fast as brick and mortar, but is still less than 6% of all retail sales. Fully 94% of retail is still brick and mortar. Traditional retail is forecasted to continue with steady growth, while the torrid growth in online retail is expected to slow (trees don’t grow to the sky). Remove forecasted growth in China – which is really anyone’s guess – and the differences are even more pronounced.
The question is not retail’s forecasted growth rate in the future. As you have heard me say before and will hear me say again, I don’t know how to predict the future. Neither do you. The question is whether or not retail has fallen out of fashion to the point that unloved brick and mortar stocks can be purchased at a discount to their performance and with a margin of safety with respect to their asset values.
These stocks will have ups and downs, especially around quarterly earnings reports, but I would expect them to outperform over a period of a year or two. Absent a market crisis, I would recommend selling any losing stocks at 364 days, while holding winning stocks for at least one full year. I have focused on large cap stocks here because they have been the most affected by the whims of Wall Street fashion, but smaller capitalization stocks are another good place to find value. Following is a list of large cap retail stocks with a good balance of performance (as measured by return on assets, return on equity, and return on invested capital) and value (as measured by price/earnings ratio):
I wish you a very happy holiday and a prosperous 2015!
Alan Stevens is Managing Director of Research and Portfolio Management at Lyons Wealth Management LLC, a Florida-based subadvisor to several mutual funds. He serves as Portfolio Manager for Catalyst/Lyons Tactical Allocation Fund and is Co-Portfolio Manager for Catalyst/Lyons Hedged Premium Return Fund. He also manages several separate managed account strategies and alternative asset funds, including Lyons Tactical Overlay Program. He holds his MBA from Harvard Business School and a BA from Lake Forest College.
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