Retail appears to be flavour of the month -- so steer clear.
Apparently, retail was one of the hottest sectors of all in 2009. Who'd have thought it? Well the contrarians amongst us certainly did. But now, it's beginning to look like things are getting a little out of hand.
Many retailers' post-Christmas results are coming in ahead of expectations and forward ratings look very modest. As the recovery sets in in earnest, so share prices will gradually return to former levels rewarding investors with a market-smashing return on their investments, won't they?
Well not in my book. For me, the real trouble for retailers still lies ahead. The record low interest rate environment and general Keynesian pump-priming may yet see us through, but the low, low interest rates won't last forever.
It all feels a bit like a short-term holiday for non-essential, non-food retailers. There may well be a bit of a time lag as homeowners postponed essential but non-urgent purchases, but for luxury goods and the like, why take the risk?
Where angels fear to tread
This hasn't stopped investors from piling in where angels fear to tread. But a lot of the recovery is already in the prices and then some, in my book. Yes, there were manifold bargains to be had in the sector last year. But now!?
Today, for example, we learned that sales surged at designer fashion group Ted Baker (LSE: TBK) in the run-up to Christmas, due to the company's "innovative product design". Well maybe, but all-time low interest rates didn't do any harm either -- particularly for those with tracker mortgages.
As I write, Ted's shares are 513p. In March they were £3. I have no individual view on Ted Baker (aside from shunning their overly expensive shirts that is) but this is one heck of a rise -- and it's already happened during a record low interest environment.
Wheat and chaff
This is not to say that some retailers won't do well. There are a few value gems amongst the many others with flimsy balance sheets who are a few months' poor trading away from administration at any given time. And whenever the UK economy emerges from recession, there are always some non-food retailers who do extremely well.
For example, Next (LSE: NXT) and French Connection (LSE: FCCN) were both ten-baggers for those who bought in the depths of the early 1990s recession, and Next enjoyed a pretty smart 2009, managing to more or less double in the year. The clothier's upbeat trading statement on Tuesday helped lift the shares further still.
Anomalous time
But many retailers' figures will inevitably look good compared to 2008, which was anomalous in a horrible way for pretty much anyone trying to sell anything but food on the High Street. Since then, with interest rates at a low and companies cutting stock levels right back and trying to slash spending, it's no great surprise that the figures are looking a lot healthier.
Will it continue? Maybe, but it certainly doesn't look a risk worth taking for my two penn'orth, particularly when you look at many retailers' wafer thin historic operating margins, and factor in the gross margin drop due the weakness in sterling. The pound's weakness, though, is a double-edged sword. It has also helped retailers selling to shoppers from abroad, most notably those from Euro-land snapping up British bargains.
For my money, there are other sectors and individual companies within them that look far more promising, so I'll be shunning the High Street for now.
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