It's fair to say ASX 200 retail shares are out of favour at the moment. With so much commentary about rising inflation and interest rates, and Australians reducing their spending, most ASX investors today are assuming the retailers aren't going to do well in the short term. And they're probably right.
But that's exactly why you should buy high-quality ASX 200 retail shares now, according to Motley Fool Australia's chief investment officer Scott Phillips.
During a NABTrade webinar, Phillips says ASX investors are currently "overweight" in short-term thinking and ignoring great opportunities as a result.
ASX 200 retail shares have taken a hammering
Phillips said:
I think there's a lot of quality retail that is just way too cheap right now because … people are overweight in the short term.
'There's a great saying by Morgan Housel, a great finance writer, who says, 'In hindsight, every crisis looks like an opportunity, but in the present every crisis feels like a crisis.'
Phillips cites popular ASX 200 retail share JB Hi-Fi Limited (ASX: JBH) as an example.
The JB Hi-Fi share price hit a 52-week low of $36.69 in June. It has already recovered by almost 20% to trade at $42.98 shortly after the market open today. However, in the year to date, it's still down 12%.
Phillips said:
I think what we'll do is look back and when JB Hi-Fi's profits are whatever they are in 2027, and we look back and say, 'Man, we had an opportunity to buy that, [but] we were so worried about the short term'.
Don't buy retail shares indiscriminately
Phillips pointed out that many quality retailers are now trading on single-digit price-to-earnings (P/E) ratios JB Hi-Fi is one of them with a P/E ratio of 8.99, according to the ASX website.
Phillips said:
… It's so hard to look through this and say, 'Well what if there is a recession? What should I do? et cetera, et cetera'.
With a long-term lens, I think we'll look back and see retail on single digit P/Es and say, 'Man, really?'
I'm talking about discretionary retail, which is really bumpy right now. There'll be some that go broke in all probability. So I'm not saying buy the whole sector, I'm not saying buy indiscriminately.
What I am saying is the quality end of that spectrum I think is just way too cheap because the markets are ignoring the potential.
Examples of quality retailers on single-digit P/Es
A quick scan of ASX 200 retail shares reveals a bunch of other big-name companies trading on single-digit P/E ratios.
They include Harvey Norman Holdings Limited (ASX: HVN) shares on a P/E of 6.24 and Super Retail Group Ltd (ASX: SUL) shares on a P/E of 9.57.
Examples outside the ASX 200 include Adairs Ltd (ASX: ADH) shares on a P/E of 8.51 and Dusk Group Ltd (ASX: DSK) on a P/E of 6.57.
How to pick ASX 200 retail shares today
As my Fool colleague Tristan writes, Phillips also provided some general advice to ASX investors on what to look for when researching companies today.
He said investors should consider a company's pricing power, debt levels, and capital needs.
Pricing power is valuable because it helps offset rising costs due to inflation. So, look for companies supplying products and services that customers are going to keep buying or using regardless of price bumps.
Consumer staples retailers are a classic example, with Coles Group Ltd (ASX: COL) among the companies that have been raising prices this year.
In terms of debt, look for companies with manageable or low debt. With interest rates rising rapidly, the cost of carrying debt is increasing substantially.
