Today I’m going to look at one of my favourite areas of the market for making money.
I’ve dabbled in the General Retail sector for years now, mostly because:
1) It’s easy to understand, and;
2) It often produces enormous multibaggers for ordinary investors prepared to take a punt.
My attraction to general retailers kicked off almost 20 years ago.
There I was, some young kid already bored with a 3-stock portfolio of British American Tobacco, BT and Hanson, and seeking sexier returns from smaller companies.
And then, Jim Slater’s Zulu Principle, the Investors Chronicle and a tipsheet called Analyst all pointed me towards JJB Sports.
I bought in and about three years later I had quadrupled my money
These days, JJB Sports is a byword for disaster. The sports chain experienced all sorts of difficulties in the crunch and went bust the other year.
But during the mid-90s, JJB was actually a renowned retailer and dynamic growth share favoured by many.
You see, back then the chain was enjoying massive demand for replica football shirts.
Sales were booming, which helped JJB report annual profit growth of 20%-plus and encouraged investors to bid the shares to a mighty 30 times earnings.
I can’t remember the exact prices, gains and dates, but I do distinctly recall buying in and celebrating about three years later when I had quadrupled my money.
I couldn’t believe the gains I’d made…
…until 1998, when a series of profit warnings thumped JJB’s shares and I watched in terror as my profits all but evaporated.
Still, I held on as the business recovered, bought some more shares at the lows and the price at least quadrupled (again) from the bottom.
Thankfully I got out with a very respectable overall gain years before JJB finally bit the dust.
The market is often willing to apply very high valuations to successful retailers
My escapades with JJB and the possibilities of doubling, tripling or even quadrupling my money in a few years hooked me onto retailers.
A lot older and wiser, I now recognise the retail sector offers these broad features:
- Retail fashions/comebacks can seemingly emerge from nowhere, thereby creating attractive growth/recovery stories not linked to the economy or wider business developments;
- But then again, high street competition is rife and booming sales tend not to last for years;
- Costs (rent, staff, and so on) don’t always rise in tandem with sales, so top-line booms tend to amplify earnings substantially;
- But then again, costs (rent, staff, and so on) don’t always fall in tandem with sales, so top-line problems tend to hurt earnings significantly;
- The market is often willing to apply very high valuations to successful retailers with major growth prospects;
- But then again, the market is often willing to apply very low valuations to troubled retailers with few recovery prospects.
JD Sports up 123%, Topps Tiles up 454%, Sports Direct up 689%
The General Retail sector has continued to offer major winners during the last few years, including:
- JD Sports – Up 123% during the last year
- Topps Tiles – Up 454% during the last two years
- Next – Up 226% during the last three years
- Sports Direct – Up 689% during the last four years
- Debenhams – Up 207% during the last five years
All five names have had their ups and downs, too.
Next nearly went bankrupt in the early 90s, JD endured acquisition trouble about ten years ago, while the Topps, Sports Direct and Debenhams each suffered woes in the banking crash.
Nonetheless, all five have gone on to record mega-gains as their underlying businesses recovered…
…and in the case of Next and Sports Direct, evolved into powerful market leaders and tip-top growth businesses.
I am certainly not tempted by Debenhams
A quick skim of those five retailers does not suggest any imminent multibaggers to me.
I am certainly not tempted by Debenhams, even after its New Year profit warning.
You see, this business carries very hefty debt and leasehold liabilities and the present valuation does not offer enough upside potential to me given the risk of further trading setbacks.
Meanwhile, I find it hard to back Next after the group essentially admitted its shares were too expensive by announcing a special dividend instead of further share buybacks!
The valuations of Topps, Sports Direct and JD all look between fair and expensive to me.
It’s a small, higher-risk retail punt that’s not for widows and orphans
Personally I’d prefer to back retailers that have NOT multibagged in the last few years – but have the potential to do so in the next few!
If you were paying attention to my Collective of last week, you’ll know I hold French Connection.
Yes, it’s a small, higher-risk retail punt that’s not for widows and orphans.
But the hapless fashion chain has shown recent glimmers of a turnaround and, with market cap of £35m currently buying almost £190m of sales, could offer significant upside potential if the business can return to profitability.
I should admit I had hoped my French Connection holding would multibag last year – and the year before that – and the shares did nothing of the sort.
So whether it is third time lucky for 2014 is anyone’s guess. Wish me luck.
