The Curious Investor

Seven Irrational Retail Valuations

With your outlook on inflation, do you believe there are any safe places to invest? If equities with 8-12% earnings yield are not acceptable, how could you justify holding cash or bonds?

I also think you miss my point. I'm not arguing that ALL retailers are a good buy right now. I'm saying that despite some being stronger than others, ALL have had their valuations compressed into a tight range. Logically, those which are "better" must be irrationally priced and provide more upside than the rest of the category. Furthermore, I advocated looking at multiple valuations on a FORWARD basis, which implies significant negative growth over the next year for many of these companies. Unless you believe negative growth will continue for many years into the future, I think that assuming one more dismal year and no growth for the rest of eternity after that is quite conservative.

Many economists are predicting an ECONOMIC (not necessarily market) bottom by the second half of 2009 and definitely by 2010. Even if we're mired in a credit restricted world after that, long run growth in the economy should continue to be at least modestly positive (~2%). Retailers are plugged directly into economic growth and, as such, I think I'm reasonably justified in believing that these valuation levels could be quite compelling.


On Jan 30 12:24 PM 123 wrote:

> "The market is unfairly punishing retailers"- Do you know how many
> retailers have gone bankrupt in the last year? This will continue
> and get worse.
>
> You think there will be no growth-I think there will negative growth
> in earnings. I think we are now seeing the tip of the iceberg -
> we do not yet see the full effects of this recession in these retailers'
> earnings, but we will.
>
> Basically my view is that your assumptions are misguided.
>
> Also I think an 8-12% earnings yield (even a realistically stable
> one) is nothing to jump up and down about considering that inflation
> in the US is around 8-10% per year and maybe even higher in the future.
> You can thank Mr. Obama and the Fed for that.

Seven Irrational Retail Valuations

This depends on your time horizon. Credit will return to the United States. Hopefully, consumers will learn to be more moderate and I agree that it may take years before we reach 2006-2007 sales levels again. My argument in this article is that the market has unfairly punished all retailers when some actually are performing better than others thus providing an opportunity to pick and choose.

On a more technical note, if you assume earnings as a proxy for long term cash flow and anywhere between 8% and 12%, no growth P/Es are justified between 8 and 12 which is exactly where we're trading today on a forward basis. Basically, a lot of valuations today include dismal forecasts for 2009 and nearly no growth from there. Will we make astronomical returns as stocks rapidly return to their previous all time highs? Probably not. But, is there room for significant appreciation from current levels? I don't think anyone can deny that.


On Jan 29 11:31 PM 123 wrote:

> I think that you are wrong, dead wrong.
>
> These companies ARE all fundamentally changed by this - and what
> we have going on is not a mere recession.
>
> Don't imply that Mr. Market an idiot. Mr. Market burned a lot of
> people over the last 7 years.
>
> The retailing business in the United States has fundamentally changed.
> Times will be tougher than in the past. People will not make credit-fueled
> purchases of $80 T-shirts made in China anymore. Throw the old P/E's
> out the window because they have no relevance anymore.

Seven Irrational Retail Valuations

Ah great. The editors at SeekingAlpha replaced the graph with the better one. Happy investing to all!

Seven Irrational Retail Valuations

The chart above is slightly off as I've calculated current and forward P/Es based on share price from the previous year. For an updated chart, I'd suggest visiting the original post at: thecuriousinvestor.com.../

Seven Irrational Retail Valuations

wobatus,

thanks for the catch. I will have to fix this chart. I used year ago share price to calculate my current P/Es. Should have checked better.

I agree with your thoughts on BKE and in fact have been looking at it very closely.

Seven Irrational Retail Valuations

It's true. Anyone with a crystal ball would be quite well off in any market. But, my contention is that retail valuations are so askew, that there is a good chance that with a rational approach to due diligence, you'll be able to separate the best deals from the worst rather easily.

As far as retail rebounding before housing or automotive sectors, I think just because the price point is lower and because clothes are a less durable good and more "liquid" that it will be easier for consumers to buy marginal items of clothes as opposed to replace a house or a car (much less buy an additional one).