There doesn't seem to be much that's spooking investors these days. Ever-rising geo-political tensions loom over a roiling White House and stymied Congress. Yet, the markets remain eerily calm. Volatility continues to be low and consumer sentiment is high. The market is widely considered to be pricey, but the extended bull market seems to be keeping investors pretty upbeat.
But there are some sectors that investors seem to be fearful of, particularly retail. Discipline value investing requires one to go into areas of the market that are unloved and in some cases by exploring such sectors, warts and all, an investor could find some value.
The stock screening models I created for Validea were inspired by some of history's most prominent market gurus, including famed value investors Benjamin Graham, Warren Buffett and Kenneth Fisher. Buffett, inspired by Graham, avoids the "hot" stocks surrounded by media buzz, nor will you see him cut and run when negative hype abounds. He goes for stable companies with strong fundamentals, capable management and a durable competitive advantage--that provide goods or services that are easy to understand and that people need and want. Fisher pioneered the use of the price-to-sales ratio ( PSR ), which compared the total price of a company's stock to the sales the company generated, rather than the typically used price-earnings ratio. According to Fisher, evaluating price as it relates to sales gives investors the opportunity to find companies that might be operating at a loss (and have low PSR's) but still have good prospects for growth (such companies wouldn't have P/E ratios as earnings would be less than zero).
Rather than avoid the "spooky" sectors, these guru philosophies can help identify where opportunities may be lurking.
Retail Sector Trends
On the whole, the retail sector has seen hard times. Online retailers such as Amazon are taking huge chunks of market share from brick-and-mortar retailers--which has led to store closures--and recent natural disasters have added insult to injury. Technological innovations and omni-channel stores are offering customers myriad shopping/buying options, and the sector continues to undergo transformation as competition escalates.
That said, there is optimism stemming from increased sales (as wages grow and unemployment remains low), and some retailers are opening new stores. The possibility exists that some of the retail naysaying has been overdone. Between August and September, retail sales saw a slight uptick of 0.5%, while year-over-year numbers reflected 3.2% sales growth for the sector, according to the National Retail Federation.
Earlier this month, the NRF announced that it expects holiday retail sales in November and December - excluding automobiles, gasoline and restaurants - to increase between 3.6 and 4 percent for a total of $678.75 billion to $682 billion, up from $655.8 billion last year. "Our forecast reflects the very realistic steady momentum of the economy and overall strength of the industry," NRF President and CEO Matthew Shay said. "Although this year hasn't been perfect, especially with the recent devastating hurricanes, we believe that a longer shopping season and strong consumer confidence will deliver retailers a strong holiday season."
This data, coupled with overall positive consumer sentiment, could uncover some promising names for the contrarian investor, even those that have stumbled of late, such as SIG, FL, and FRAN, all of which earn high marks from our Graham- and Fisher-based models. Our Buffett-based model gives a thumb's up to NKE and HAS. The retail industry is one of the areas of the market that trades at a big discount, and it will be interesting to see if these turn out to be good values or value traps, but since I invest systematically I've been buying some of these names and hoping that investors have overreacted to the downside on these names.
At the time of publication, John Reese and/or his private clients were long SIG, FL, NKE and HAS.