10 best retail stocks to weather High Street storm

It’s traditional at this time of year for investors to look closely at how well British retailers have traded over the festive season. The High Street is home to some large and very popular stockmarket names – and their December trading can say a lot about consumer confidence and economic prosperity (or malaise).

This year there are grey clouds hanging over the sector. Figures from some of the big store chains are expected to be on the low side. We’ll probably hear chief executives blaming everything from the wrong kind of weather to inflation and changing trends in how and when customers actually make purchases.

But while these issues and the prevailing economic climate are clearly important to retailers, it’s also true that some business are simply better positioned to weather these sorts of pressures. And this is exactly what we’ve seen in some of the earliest company updates in 2018. It’s a massive reminder for investors that the overall investment profile of any company can say a lot about how it might perform.

A focus on quality, value and momentum

To get an idea about ‘investment profiles’, let’s take a look at Next plc, the stalwart of British fashion and homeware. For many years Next (NXT) was the gold standard in successful retail roll-outs. In fact, for several years up to 2016 it was making so much cash that it was routinely throwing it back to shareholders through well-crafted share buyback programmes and special dividends.

But things changed for Next in 2016, with profits coming under pressure as it tried to build sales in its online directory business. The share price was hit hard, and through much of last year its investment profile was very much contrarian. It was still a very good quality business, but its shares were much cheaper because it had fallen out of favour, and its momentum was on the floor.

Gradually, Next’s momentum returned through late 2017, and it surprised the market with a strong earning update just after Christmas. It’s early days, but Next’s quality appears to be seeing through a challenging period, and the share price is once again on the up.

At the other end of the spectrum is Mothercare plc (MTC), the group that deals in merchandise for babies and young children. Mothercare has described itself as being in the process of a turnaround as it tries to reinvigorate its core UK business in the face of tough competition.

Last spring, its shares looked reasonably priced and were showing signs of momentum. This offered hope that it really was the sort of turnaround that value investors love. But the big problem is that Mothercare suffers from weak financial quality characteristics.

With a couple of big profit warnings, investor support slumped even further in 2017. That meant the only appealing thing about Mothercare shares was that they looked cheap.

However, cheap stocks with low quality and limp momentum can often end up being value traps (i.e. they just get cheaper and cheaper). And with another profit warning just after Christmas, this is exactly where Mothercare finds itself.

It may well recover – but right now Mothercare doesn’t look like a high probability stock. Unlike Next, it simply doesn’t have broad exposure to quality, value and momentum.

Retail market comparisons

Now, you could argue that it’s unfair to compare Next and Mothercare, which are different businesses appealing to different markets and different investors. While that might be true, the bigger picture is that investors should consider the investment profile of any company (in any sector) to understand the strengths and weaknesses of their quality, value and momentum. Academic and professional research shows that these factors have consistently been some of the most influential drivers of returns in the stockmarket.

With all this in mind, here’s a screen looking at retail companies with the highest exposure to quality, value and momentum. Each rank is calculated using a range of different ratios to get the most accurate overall view. The StockRank is a combination of all three ranks – ranging from zero (poor) to 100 (excellent).

Name PE Ratio 1 Year Relative Price Strength Quality Rank Value Rank Momentum Rank Stock Rank SCS 10.1 21.3 95 93 92 99 Bonmarche 11.3 40.1 97 91 84 99 Next 11.7 20.7 82 59 96 96 John Lewis of Hungerford 17.9 -2.11 93 91 43 94 Motorpoint 14.8 58.3 78 47 97 92 Kingfisher 13.3 -8.52 84 72 64 91 Halfords 12.8 -3.52 77 82 57 89 WH Smith 21.5 31.1 99 30 83 88 Sports Direct 26.7 23.8 64 66 83 88 Vertu Motors 18.9 6 49 87 77 88

The top positioned stock here is the sofas and carpets retailer SCS (SCS). It’s a highly cyclical business that’s very sensitive to consumer sentiment, but right now it’s showing a strong overall blend of quality, value and momentum. Among the others are some well know High Street names ranging from Bonmarche (BON) and Next to Halfords (HFD), WHSmith (SMWH) and Sports Direct (SPD).

Resolutions for 2018

In the post-Christmas period, all eyes tend to be on retailers because they often set the tone for the stockmarket in the early weeks of the new year. What we’ve seen so far is general uncertainty, but it’s clear that some businesses are much better placed to resist external pressures than others.

This year, it’s worth remembering that the overall investment profile of a stock – regardless of its sector – can be a pointer not only to how it might perform in future, but also how well it might resist unknown challenges.

About Stockopedia

Interactive Investor’s Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard’s review of Stockopedia.com and learn more about the site.

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About the Author

Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including “How to Make Money in Value Stocks” and “The Smart Money Playbook”

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.