Small Retail Picks

With the high street starting to recover from the recession blues, we look for bargains amongst some smaller retailers.

Considering that we're in recession (perhaps near the end of it, but still in economically turbulent times), and that the high street has suffered badly as belts were tightened and spending curtailed, I expected retail shares to be lowly valued.

With that in mind, and with recent statistics suggesting that the retailing downturn is starting to change direction, I had a look last month at a few of the UK's biggest retailers, hoping to find some investment bargains. But I was disappointed to find that none of the biggies were screaming “Buy me”.

So today I've turned my attention to some smaller retailers, to try to get a feel for the market and to see if there are any bargains out there. I only looked at companies with positive earnings, watching out for any with low P/E ratios but healthy forecasts, and the following few caught my eye.

Not just stamps

Stanley Gibbons (LSE: SGI), the expert in all things collectible, is a company that has been in and out of favour with private investors over the years. On current figures, with earnings growth forecast for this year and next, it looks like it might be worth serious consideration. Its P/E for the year ending December 2009 is a relatively lowly 7.7, falling to 6.7 for 2010's estimates. And there's a modest, but welcome, dividend of 3% to be had this year -- and with net cash, there doesn't seem to be any reason for that to be cut (in fact, it is expected to grow in 2010).

Expensive tiles

Another company that has had periods of popularity with investors, for reasons I've never really been able to fathom, is Topps Tiles (LSE: TPT), and it seems to be in favour again at the moment. Despite a forecast drop in earnings this year, and only a modest improvement expected next, the shares are trading on a P/E of over 18 for this year (and around 17 for 2010). There's a dividend yield of 3.3%, but that doesn't seem to me to support such a high valuation.

Printed cardboard

On a P/E of 17 for the year just ended, Clinton Cards (LSE: CC) is another of those roller-coaster shares. The prospective P/E falls to just over 10, though, on 2010 forecasts, which might look cheap. However, a lot of investors are afraid that the market for actual printed greetings cards is destined for history, with electronic messaging systems likely to take over (perhaps not completely, but enough to dominate the market). And with the company struggling to save cash (it had net debt of £58m last year -- we're still waiting for this year's report), it seems unlikely that dividends are going to remain untouched, so it looks like there's good reason why the shares are so lowly rated.

Interior decor

A name that can cause flashbacks of horror for blokes old enough to remember the eighties (all that horrible twee décor really was a girl thing, wasn't it?) is Laura Ashley, or Ashley (Laura) Holdings (LSE: ALY), to give the company its proper name.

I'm sure the available range of home furnishings has changed since then, and the company seems to be doing quite well these days -- people staying at home and prettying up their surroundings rather than moving house must help. With its full year ending 31st Jan 2010, the company is on a prospective P/E of 17, which seems quite demanding (and there are no 2011 forecasts available). However, the forecast dividend of 1.3p per share represents a dividend yield of 7%. The 2009 books show net cash (though a fair bit less than the previous year), and as we're so far through the year, that forecast dividend must be pretty firm (even if it's not quite covered by forecast earnings). As long as earnings don't dip in 2011, the shares might well be worth considering for that dividend alone.

The best and the worst?

So, what's the overall picture? It seems to me that smaller retailers are, as we should expect, a bit of a mixed bag -- but there's no sign of a sector in retreat, with the valuations of the companies I've covered not looking anything like fire sale prices.

Of these four, I think I'd discard two of them quite quickly as investment candidates. As I said, I've never really understood the attraction of Topps Tiles, and today's valuation just looks too rich. And Clinton Cards is the other I'd strike from the list, because of its uncertain future.

So that leaves Stanley Gibbons, whose numbers (on this preliminary inspection, at least) I quite like, and with two years of decent growth forecast and no debt problems, the shares look cheap to me. (But the one caution is that the only analyst making forecasts is the house broker, Seymour Pierce.) And Laura Ashley looks tempting for that juicy dividend alone, tempered only by the absence of 2011 forecasts and concerns over its future ability to cover its dividend through earnings.

I'd need to do a lot more research before I'd actually buy either, which is what you should do too, of course.

More from Alan Oscroft:

• Mobile Merger Mania

• The Rule Shaker Revisited

• Shares On My Watchlist