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Are retail stocks a buy?

Retailer stock prices rose massively over the past year but are they about to do it again?

Last year, when the media finished its frenzy of slamming retail companies, savvy investors made their move and were sometimes rewarded with three-digit returns. However, the recent downturn in the market has made some stocks cheaper, which has provided an opportunity for income and value investors alike.

Investor expectations weighing in

Super Retail Group (ASX: SUL) is trading higher than most others in the industry, currently at a PE of 18. However, investors’ expectations have been well-founded with this one since the company has averaged 44% returns over the past five. However, it’s not the only source of its expensive price tag. In its most recent half-year report, the company said that NPAT was an impressive 73.5% higher than in the previous corresponding period. Perhaps this company is the best long term retailer for Australian investors. With new stores in the BCF and Super Cheap Auto division opening right around the country every year, revenue and profit is likely to keep going up.

88% is not enough

All of Australia’s retailers have been outclassed by this stock in the short term. JB Hi-Fi (ASX: JBH) has gone from strength to strength recently and is currently 88% more expensive than it was this time last year. At one stage the company was up over 100% but in the recent correction, investors sold it over 10% lower. At current prices it pays a dividend of 4.3% fully franked.

Harvery Norman (ASX: HVN) is more diversified than the other retailers and although 57% of revenue comes from its retailing division, it has still managed to outperform the market in the past year. If you bought the stock this time 12 months ago, you would have been sitting on a 33% gain plus healthy dividends – currently at 3.4% fully franked.

The next two companies are both attractive for value and income but perhaps one is better placed for growth than the other. David Jones (ASX: DJS) has been worst affected by new retail conditions, when compared to the other biggest brick and mortar retailers, but offers investors a 7% dividend.

With the release of its most recent sales figures, investors proceeded to sell the stock down over 20% in just 3 weeks, perhaps many of those disgruntled shareholders were wishing they chose Myer (ASX: MYR) for their money instead. Based on current prices, Myer pays an 8.2% fully franked dividend but is also impressing growth investors. The company’s strategy to push down prices and attract a different customer base allowed sales in its most recent quarter to expand by 0.4%. At a price to earnings of only 10, this retailer might be the next one ready to make a move.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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