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Why the Myer Holdings Ltd (ASX:MYR) share price is surging on a JP Morgan upgrade

The share price of Myer Holdings Ltd (ASX: MYR) has surged ahead today to recover all of yesterday’s big losses and then some.

The stock rallied 12.5% to 47 cents during lunch time trade when the consumer discretionary sector is trading in the red and as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index slips 0.5%.

It’s rare to see the embattled department store operator outperform and we know it isn’t the stronger-than-expected jobs data released today that’s driving its bounce as its peers JB Hi-Fi Limited (ASX: JBH), Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are down between 0.5% and 1.2% at the time of writing.

Myer’s bounce is probably due to JP Morgan upgrading the stock to “hold” from “underweight” following its profit results yesterday that showed a 52.2% drop in adjusted net profit to $32.5 million as total sales dipped 3.2% to $3.1 billion for the year ended July 28, 2018.

However, the bottom line was ahead of JP Morgan’s $28.9 million forecast and the retailer’s margins were also better than what the broker expected.

There are three other reasons why JP Morgan has upgraded its recommendation on Myer. The first is its confidence at the new chief executive’s (John King) back-to-basics strategy to focus on sales growth through greater online penetration and a smaller network of stores.

King is aiming at engaging discount/value shoppers instead of the so-called “aspirational” shopper, who is more difficult to attract in this competitive segment.

The second is Myer’s success in winning support from its bankers. Its refinancing of debt has been pushed out to February 2021 and its debt covenant has been relaxed to give management greater flexibility.

JP Morgan also believes there is valuation support for the stock as a lower capex and its expectations of improved profits put the stock on a FY19 price-earnings multiple of around 10 times. The broker has lifted its price target on Myer to 43 cents from 37 cents a share.

But Myer isn’t out of the woods. The company continues to be attacked by its largest shareholder, Solomon Lew’s Premier Investments Limited (ASX: PMV), which called Myer’s board an “absolute disgrace”, according to the Australian Financial Review.

Further, shareholders are unlikely to see much financial benefit from King’s new strategy in the short-term as even the new boss of Myer admits sales over the next few years will be volatile.

Even if King can stop the bleeding at Myer, I think this isn’t enough reason for bargain hunters to jump in – not when there are better retail stocks on offer.

I would rather bet on the turnaround of discount variety retailer Reject Shop Ltd (ASX: TRS) as it is on a more attractive valuation, and unlike Myer, pays a dividend.

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Motley Fool contributor Brendon Lau owns shares of The Reject Shop Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended The Reject Shop Limited. 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 Scott Phillips.