Too much has been written about the devastating impact of Amazon's arrival in Australia with the market still divided on the true impact that the online shopping giant will have on the retail sector.
A range of retail related stocks like music and electronics retailer JB Hi-Fi Limited (ASX: JBH) and shopping centre operator Scentre Group (ASWX: SCG) have taken a beating with their stocks down 14.2% and 9.2% since the start of the year, respectively, when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up close to 6%.
But the broad-based de-rating of the sector has thrown up some buy opportunities that are still under the radar of most. This is particularly true for the smaller end of the market.
If you are wondering where to start hunting for those Christmas bargains, Citigroup is offering tips on the sector. Right at the top of its buy list is jewellery retailer MICHAELHLL FPO (ASX: MHJ).
The broker thinks Michael Hill is too cheap to ignore with the stock trading on an FY18 price-earnings (P/E) multiple of just 13 times.
Sentiment towards the ASX- and NZX-listed retailer is weighed down by two of its loss-making businesses, Emma & Roe and its US operations.
Citigroup thinks management can turnaround Emma & Roe and sell the US business. If these two divisions were unwound from the company's profit and loss statement, the stock would be only trading on a FY18 P/E of 10 times – a 33% discount to its Australian retail peers.
It believes that is too excessive and is urging investors to buy the stock with a price target of $1.70.
Another tailwind I am expecting for Michael Hill is from the passing of the same-sex marriage bill. While I am not expecting lovers rushing out to get married, I think many will symbolise this historic moment by exchanging jewellery. This could mean a very nice Christmas trading period for the retailer.
Michael Hill isn't the only small cap retailer worth keeping your eye on. Citigroup has also nominated footwear and apparel retailer Accent Group Ltd (ASX: AX1) and light fitting company Beacon Lighting Group Ltd (ASX: BLX) as two other "buy" ideas for the sector.
"We consider the emergence of BB Capital on Accent's register (formerly known as RCG) could be a game changer and potentially lead to new earnings growth opportunities through international expansion and improved rental deals," said the broker.
"Beacon is expected to have 12 months of favourable trading conditions ahead as it cycles the negative impact from the Masters shutdown and reaps the benefits from the accelerated FY17 rollout."
The experts at the Motley Fool has also put out a free report on the winners and losers from the arrival of Amazon. Click on the link below to get your free copy of the report.
