MENU

One retailer putting Myer & DJs to shame

With many retailers looking cheap, Dean Morel of The Motley Fool takes a closer look.

With two large US value funds, Motley Fool’s Scott Phillips and a couple international analysts I respect all seeing value in the Australian retailers, it’s time for a closer look.

After digging through the sector I found one stock I’d consider buying.

For this week’s stock on our radar I choose Specialty Fashion Group (ASX: SFH) ahead of six better known retailers.

But before choosing the owner of the Katies and Millers brands, I wanted to double-check whether value had re-emerged in Myer Holdings (ASX: MYR), David Jones (ASX: DJS) and Harvey Norman Holdings (ASX: HVN).

It hadn’t.

Instead of value, I continued to see value traps.

More promise in high returns

I found more promise in the historically high returns on capital offered by The Reject Shop (ASX: TRS), JB Hi‑Fi (ASX: JBH) and OrotonGroup (ASX: ORL).

All three offer the possibility of brighter days ahead. They are well managed, though Oroton’s and JB Hi-Fi’s brand-power elevates them to the top of the pack.

How’s that working out for you?

Circling back to those large US value funds, we find Matthews International Capital Management started buying DJs back in May, while Harris Associates started accumulating Myer in April. Both funds were buyers of their preferred department stores at substantially higher stock prices, and both have since doubled down on their investments.

I can’t fathom what those funds were thinking earlier this year. Buying retailers at fair value, in the face of dwindling consumer confidence and an increasing saving rate, is a high risk investment – to put it politely.

At least their recent purchases have the ring of value about them. That is, if you believe department stores have a reasonable future in the retail landscape.

The Foolish bottom line

Finally, let’s revisit my stock of the week, Specialty Fashion.

As the chart below shows, Specialty has better value credentials than either of the beaten down department stores or the beleaguered Harvey Norman. While at the same time it sports a return on shareholders’ funds that allows it to stand proud alongside three of Australia’s best retailers.

Specialty Fashion sports great returns on equity, multiple possible catalysts and lies discarded in the bargain bin. No wonder it’s a stock firmly on my radar.

Retailer multiples and ratios Source: Capital IQ – Click Image to Enlarge. Enterprise Value to EBITDA & Price to Book Value use left axis, return on equity or revenue growth use right axis.

More:

Free Report: Read This Before The Next Market Crash

Dean Morel is The Motley Fool’s Investment Analyst. Dean has no position in Specialty Fashion Group or any other Australian retailer at this time, despite being sorely tempted by a couple bargains last week. The Motley Fool has an upstanding disclosure policy.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!