3 ASX shares that could be a value trap

Credit: Amada44

In the last few weeks Nick Scali Limited (ASX: NCK), The Reject Shop Ltd (ASX: TRS) and Fantastic Holdings Limited (ASX: FAN) have released their 2015-16 annual results to the market, and as you will see, the respective companies’ performance metrics are varied.

A summary of how each company has fared this reporting season (for the 2015-16 financial year) is tabled below, but I’ve deliberately excluded the base figures and focused instead on the respective growth rates for each category:

  Fantastic Holdings Limited Reject Shop Ltd Nick Scali Limited
Growth in revenue (%) 9.4 5.7 30.4
Growth in NPAT (13.4) * 20.1 53.1
Growth in dividend on the prior corresponding period (pcp) 40% ** 41% 112% (including a $0.03 special dividend)

* excluding non-continuing items, NPAT of $21.4m would have meant growth in NPAT of 12.4% instead of a fall in NPAT of 13.4%

**excludes a special dividend of $0.15 payable on 19 September 2016

Overall, taking a broad view of each of these companies, the growth exhibited by each isn’t too bad, especially if you’re looking for good dividend growth.

However, to judge a single year’s performance in isolation, I think, doesn’t give you the full picture and I normally like to look for trends over time that show continual improvement in the business, eventually leading to higher earnings-per-share and net profit after tax.

Stepping back, the last five years (from the 2011-12 financial year to the 2015-16 financial year) for each of these companies shows the following:

  Fantastic Holdings Limited Reject Shop Ltd Nick Scali Limited
CAGR *** in revenue 2.47 7.58 13.21
CAGR in NPAT (%) (7.51) (4.83) 23.83
CAGR in dividend (%) 6.40 5.60 26.58

***compound annual growth rate for the period 2011-12 to 2015-16

Foolish takeaway

At face value, it appears that Nick Scali has well and truly outperformed the other two but, looking forward, buying shares in Nick Scali could be the riskiest play purely on valuation grounds and a subdued sales and profit growth outlook for the next 12 months. The shares have risen almost 22% since the day before it reported and, for this reason alone, I’d sit back and wait for a better entry price.

The earnings and dividend history for each of Fantastic Furniture and Reject Shop show that each have been quite variable with nice increases over a number of years, followed by a drop in earnings and dividends paid in the next year. Given both of these businesses are cyclical by nature, there’s no surprise here.

The ultimate stock for anyone’s portfolio is for steady growth upwards over time, even if the growth is considered to not be rapid. If you’re considering an investment in any or all of these businesses, I think it would be prudent to continue your research, understand where the business is in the retail cycle, and wait for better prices in the future.

These are stocks that are definitely not set-and-forget-type investments so if you eventually buy (or currently hold) shares, you should ensure you have a well-developed selling strategy that will allow you to hopefully avoid those painful times when your company actually fails to meet expectations.

However, if none of these stocks are of interest, you  may well decide to consider these three stocks instead.

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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