False bargains for retail stocks a trap
SHARES in almost every retail stock and brand are much cheaper than they were a year ago, but viewing them as Black Friday bargains is wrong.
As the biggest discount shopping period of the year gets into full swing, swapping shops for stocks may bring short-term disappointment as soaring interest rates are yet to heavily impact on retail spending. Analysts say the safest investment choices are big retailers with a long history of good returns, while smaller and newer consumer brands remain highly volatile.
Think relatively recent listings such as Step One, Adore Beauty and Booktopia, down 60-90 per cent despite the pandemic pushing many people towards online
CMC Markets analyst Azeem Sheriff said retail sales were slowing and he suggested targeting “staple” brands such as Wesfarmers and Coles.
“In this uncertain environment these are the kind of stocks you want to be looking into,” he said.
“A lot of small market cap stocks haven’t been listed long enough to provide some sort of stability. They were listed in a positive environment when a lot of people were spending, so it only gives you half the story.
“If they survive … we will have a bit more certainty.”
Mr Sheriff said 2023 would be a significant year for retailers and retail brands as people spent less money on discretionary items.
“It’s kind of hard to say they’re a bargain – just because their price is cheaper doesn’t mean they are a great company to look into.”
Shaw and Partners senior investment adviser Jed Richards said the retail sector had been “remarkably resilient” this year but he believed there was still pain to come.
“It’s a sector I’m avoiding at the moment,” he said. Mr Richards said he focused on big brands and retailers such as Bunnings owner Wesfarmers and Penfolds owner Treasury Wine Estates.
“In tough economic times the big brand names are the ones that survive and maintain their sales when everything else is getting whacked,” he said.
“When you are stepping down into that smaller market cap area it’s going to be a lot more volatile than the big boys. A lot of smaller companies rely heavily on debt … some of those will get caught out as interest rates rise.”
Bell Direct market analyst Grady
Wulff said while household goods retailing had declined sharply in the past 12 months, a strong increase in food retailing and slight increase in clothing, footwear and accessories drove overall retail sales to record highs.
“We have also seen rising interest rates around the world shift consumer priorities in spending from luxury to value purchases,” she said.
“It is predicted that when the full impact of rising interest rates is felt in the retail sector, investors and consumers will pay closer attention to value retail stocks like Best & Less and Wesfarmers, parent company to value retailer Kmart.”
Ms Wulff said people investing in consumer discretionary stocks should do their research. “Some retail stocks are trading at a heavy discount now and look poised to benefit from continued high consumer retail spend when interest rates hikes reach a pause or cut stage in the future,” she said.
In tough economic times the big brand names are the ones that survive Jed Richards