I have always been fond of retail group Kingfisher plc (LSE:KGF). The owner of B&Q and Screwfix is a longstanding British stock market darling. I view the DIY retailer as a cyclical stock. One that will perform well when the economy is firing. Conversely, when the economy is not, the Kingfisher share price can bear the brunt.
The shares are currently trading in bearish territory. A value investor like me rubs his hands at the potential of getting my hand on an under-priced stock.
However, I do not believe Kingfisher is one of these. The stock looks like a value trap to me, and here are the reasons why I will avoid buying in this business cycle.
Bearish market for retailers
I would be naive if I did not remind myself of the mid-to-long term outlook for the global economy when making an investment decision. High inflation and interest rate rises create challenging conditions for most businesses. I don’t see these conditions fading anytime soon either.
City economists are similarly pessimistic. A recent analyst note from Goldman Sachs forecast a recession at the end of this year, lasting all the way until 2024.
I am certain that this not ideal for a company like Kingfisher. The company relies on discretionary spending and its products are not essential for everyday life. Therefore, the hit to the business from consumers tightening their belts could hammer earnings for a good while yet. It is something I believe investors have priced into the discounted Kingfisher stock currently. The shares are down 30% year to date.
However, it is not just the Kingfisher share price that I am seeing affected. Other retailers like JD Sports and Frasers have seen an even steeper fall in share price (47% drop).
Ominous sentiment for Kingfisher shares
It must be said, that I discern a more bearish tone for Kingfisher compared to other retail and leisure stocks.
For instance, just last month it was one of the FTSE’s most shorted companies. My intuition tells me the bears are knocking on the door of the Kingfisher share price due to a combination of two things. These are intensifying competition within the DIY retailer sector, as well as some less than enthusiastic commentary from peers. For example, home improvement retailer Wickes recently warned it faces an “uncertain macroeconomic environment“. This came as the company announced weaker sales figures than the year prior.
Future prospects
Certainly, I do not think the discount on the Kingfisher share price represents a bargain. On the contrary, I believe the shares will continue to be beaten down while current conditions prevail.
Kingfisher is not the only retailer that will suffer. The DIY boom has eased, so I expect many of its direct peers to be similarly hit.
I like Kingfisher’s turnaround potential in the event of a growing economy. But, against the current backdrop, I believe the downside potential will be a drag on its valuation. The stock simply poses too much downside risk in the medium-term than my portfolio can tolerate.
