Bargain hunting: 3 retailer ASX shares that shouldn't be this cheap

The consumer discretionary sector has been understandably punished, but there are some stocks that could see a nice price rebound.

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Most ASX shares in the discretionary retail sector have understandably plunged over in recent months, due to the ever-increasing interest rates.

With Australians facing increased mortgage repayments for ten consecutive months, it's logical that consumers have less money to spend on products that are considered non-essential.

After all, that's what the Reserve Bank ultimately wants, to bring inflation down.

So it is that the S&P/ASX 200 Cons Disc (ASX: XDJ) is more than 4.8% lower than it was 12 months ago. It's a whopping 17.7% dive if you go back to November 2021.

Let's sift through the bargain bin

However, putting all businesses in the same sector into one basket is a fool's game when choosing stocks to buy.

The team at Morgans therefore undertook an analysis of consumer discretionary ASX shares to pick out the best buy candidates.

The analysts did this in two steps. First was to identify the most heavily discounted.

"We identify 11 consumer discretionary stocks that are currently trading within 10% of their 12-month lows," Morgans senior analyst Alexander Mees said in a blog post.

"History suggests many of these stocks could rebound."

Mees cited how the same cohort picked out 12 months ago would have seen 67% of them outperform the benchmark over the past year.

But of course, just because a stock has plummeted doesn't make it a good investment.

That's where the second filter comes in.

Not surprisingly, most of the 11 stocks reported a deterioration in sales in last month's half-yearly updates.

"Others are undergoing strategic shifts that don't yet appear to have broad investor support," said Mees.

"A few of them have recently parted ways with their CEO, adding more uncertainty to what is already an uncertain outlook."

So what's left? Are there any that aren't suffering from any of these problems? They must be the genuine bargains that have a great chance of rebounding this year.

Here are three ASX shares that the Morgans report identified:

The 3 standout ASX retailer shares right now

Lighting retailer Beacon Lighting Group Ltd (ASX: BLX) is the first "anomaly" in the bargain bin.

"The business reported record sales in 1H23 and indicated sales were 'holding up well' so far in 2H23," said Mees.

"Investors are almost certainly concerned about the risk of a cyclical downturn in the months ahead, but we believe the strategy to expand into the $2 billion trade market will allow it to offset the effect of weaker consumer demand."

The Beacon share price has plunged more than 38% over the past year. The stock does pay out a handy 5.4% dividend yield.

Adore Beauty Group Ltd (ASX: ABY) and Baby Bunting Group Ltd (ASX: BBN) have both provided bright forecasts.

"We note that Adore Beauty, which has seen its growth stall post-COVID (along with most pure play e-commerce companies), has guided to a recovery in both sales and margins in FY24."

"Similarly, Baby Bunting expects, and has guided to, an improving trend over the balance of 2H23, but has seen its share price continue to trend down."

Adore Beauty and Baby Bunting shares are both heavily discounted, each falling around 60% over the past 12 months.

Baby Bunting does pay out a 5.8% dividend yield though.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Baby Bunting Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Adore Beauty Group. The Motley Fool Australia has recommended Adore Beauty Group and Baby Bunting Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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