In July Oaktree Capital's Howard Marks told CNBC that "The real big money in the investment world — the dependable money, the safe money — is made not betting that the things that have gone up a lot will continue but on betting that the things that have gone down and become unloved will rebound."
But which share should you buy?
One of the most underappreciated results during earnings season in my opinion came from Adairs Ltd (ASX: ADH).
After a couple of years of struggles the home furnishings retailer returned to form in FY 2018 with a 45.4% increase in profits to $30.6 million.
This strong result was driven by a 14.3% increase in like for like sales, improved margins from less discounting, and strong online sales growth. The latter grew by an impressive 75% on the prior year to $42 million, demonstrating that Amazon's arrival in Australia hasn't been the company's death knell after all.
Another positive was that management also noted that more shoppers are going into its stores and these customers are buying more frequently. This appears to show that its decision to focus on larger format stores is working well.
A further positive is that FY 2019 has started strongly. Management has advised that it has achieved like for like sales growth of 5.4% year-to-date.
Why invest?
I believe this strong start puts Adairs in a great position to achieve the analyst consensus earnings estimate of 21 cents per share in FY 2019. This means its shares are changing hands at just 11.5x estimated forward earnings and offer a trailing 5.6% fully franked dividend.
I expect that if Adairs continues to perform well in FY 2019 its shares could rerate to a more appropriate and higher earnings multiple like Accent Group Ltd (ASX: AX1) and Super Retail Group Ltd (ASX: SUL) did earlier this year.
The potential combination of a strong FY 2019 performance, the rerating of its shares, and a generous dividend yield make it my favourite share in the retail sector right now.
