ASX retail shares can be some of the hardest stocks on the market to assess as a good investment. The retail sector is notoriously cyclical, and its players have to constantly adapt to changing consumer tastes and preferences.
As such, only the strongest ASX retail shares tend to be effective compounders of wealth over long periods of time.
Today, we'll discuss two ASX retail shares that might just qualify for that label, at least according to one ASX broker. We'll also cover one stock that this broker is telling investors to avoid.
ASX broker gives verdict on 3 ASX retail shares
As reported in The Australian this week, analysts at ASX broker Macquarie are eyeing two ASX retail shares that might stand to benefit from an artificial intelligence (AI)-fuelled "generational upgrade cycle in computer hardware".
Macquarie is arguing that household appliances, computers and technology typically have a "5-7 year lifespan". As such, the COVID boom in this corner of the market should result in an "echo" over the next 18 months or so.
Macquarie's Ross Curran told The Australian, "An accelerated 5-year refresh rate on PCs instead of the usual 6-year cycle, along with a 15 per cent increase in price, could see a 34 per cent uplift in category".
As such, Curran has upgraded Macquarie's earnings estimates for the 2025 financial year for JB Hi-Fi Ltd (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN) and OfficeWorks owner Wesfarmers Ltd (ASX: WES) by 4.5%, 3.7% and 0.5% respectively.
Consequently, Curran has lifted Macquarie's ratings on JB Hi-Fi and Harvey Norman from 'Neutral' to 'Outperform'. This implies investors should consider buying these ASX retail shares at current pricing.
However, Curran maintained a 'Neutral' rating for Wesfarmers, citing concerns over its current high valuation.
A tale of three retailers
To be fair, all three ASX retail shares have enjoyed some healthy rises over the past 12 months. At current pricing, Wesfarmers stock is up 33.8% since this time last year, while JB Hi-Fi has risen 26.7% and Harvey Norman, 21.25%.
Even so, Wesfarmers shares are currently trading on a price-to-earnings (P/E) ratio of 30.8. That looks elevated against JB's 13.7 and Harvey Norman's 14.6. Put another way, investors are currently being asked to pay more than double for $1 of earnings from Wesfarmers compared to $1 of earnings from JB or Harvey Norman.
As such, it's not difficult to understand why Curran sees Wesfarmers shares as more overvalued than those of JB Hi-Fi or Harvey Norman.
