Mr. Market, Value Investing and the Death of Retail

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Depending on which estimates you read, there will between 7,000 to 10,000 retail stores closing this year, and those stores won’t be replaced anytime soon, says Charles Mizrahi, editor of Hidden Values Alert and Insider Alert.

The retail industry is under attack; some would say it’s in a death spiral. In addition to the industry being disrupted by Amazon (AMZN), there are just too many retail stores to begin with.

America is overstored. In the United States, there are 7.3 square feet of retail space per capita. Compare that with 1.7 square feet per capita in Japan and France, and you could see the extent of the problem. The second major problem is Amazon. Simply put, people are buying online more than they used to.

Easy return policies, free shipping, lower prices, and larger selections make it very hard for brick-and-mortar stores to compete. Since 2010, mobile commerce has grown from 2% of digital spending to more than 20%, and it’s continuing to grow.

Many stocks in the retail market have taken it on the chin. Mr. Market has been marking down the prices of stocks across the sector. Macy’s (M) plunged 34%, Target (TGT) is down 24%, and Kohl’s (KSS) is off 21%, all since the beginning of 2017.

While the retail industry is under attack, not all retailers are created equal.

Like in every industry, there are stronger and weaker companies.

When Mr. Market starts to mark down stocks across the board, that’s when we roll up our sleeves and find the ones that don’t deserve to be selling for pennies on the dollar.

Every year, there is always a sector that is out of favor with Mr. Market. A few years ago, it was the semiconductor industry, followed by energy, and now retail industries that were being sold off by investors.

It’s always when pessimism is at its worst that sentiment starts to turn around, and there is a dark cloud hanging over the industry.

That’s why it might surprise you that our latest addition to the Insider Alert portfolio is American Eagle Outfitters (AEO), which has been caught up in the “death of the shopping mall” narrative.

The company was founded in 1977 and has been through tough times before. While other retailers are being forced into bankruptcy, AEO has been holding up well, all things considered.

Keep in mind that we are not making a long-term prediction on where the retail industry will be a year from now or the future of AEO. We added AEO to the portfolio because Mr. Market was offering the stock to us at what we believe to be a discounted price.

In addition, the Insider Alert portfolio has three other retailers: apparel retailers Michael Kors (KORS) and The Buckle (BKE) and specialty retailer GameStop (GME).

They were all added to the portfolio, not based on our timing of the retail cycle, but based on their bargain prices and rock-solid balance sheets.

How long will the current downturn in the retail cycle last and which companies will survive? We don’t have a clue. But what we do know is that if we continue to buy financially sound companies at bargain prices, we will have many more surprises to the upside than the downside.

Charles Mizrahi, is editor of Insider Alert and Hidden Values Alert.

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About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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Companies

Symbol Name Price Change % Volume
BKE Buckle Inc. (The) 23.17 -0.95 -3.94 518,665 Trade
TGT Target Corporation 111.72 -2.06 -1.81 5,095,911 Trade
M Macy's Inc 14.60 -0.85 -5.50 24,836,438 Trade
KSS Kohl's Corporation 41.10 -2.03 -4.71 3,623,610 Trade
GME Gamestop Corporation 3.56 -0.14 -3.78 4,447,956 Trade
KORS C.P.I Michael Kors Holdings Limited n/a n/a n/a 0
AEO American Eagle Outfitters Inc. 13.44 -0.66 -4.68 8,476,402 Trade
AMZN Amazon.com Inc. 1,972.74 -36.55 -1.82 6,219,094 Trade

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