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Should We Buy Outperforming Unilever plc And Debenhams Plc Now?

As Unilever (LSE: ULVR) and Debenhams (LSE: DEB) post results that exceed City analysts’ expectations, there is some evidence that consumer finances are strengthening and many retail-sector shares are on the rise.

However, although both these firms saw some underlying trading gains, much of the improvement in the figures comes from currency gains.

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Buying on good news

The retail sector looks perky, though, and by one investing philosophy, shares making new highs are attractive. Such an approach to investing is a good one, because if a share price is making new strides upwards then operational advances in the underlying business often drive the movement.

When a share breaks a new high, the theory goes that the most likely direction from there is up again. It makes sense if we think about it. When a business is trading well and the sector has an economic tailwind — as now with retailing, arguably — why would the most likely share price movement be down?

One possible reason for a share-price reversal given continued good trading might be extreme overvaluation; however, we don’t see that with Unilever and Debenhams. Markets look ahead, and if retailers are truly entering a period of abundant trading, which they may be, forward earnings could be set to improve. Under such conditions, it makes sense for valuation measures such as the P/E ratio to look ‘full’.

When companies start to outperform and to beat City analysts’ expectations, it can be a good time to invest because we often see the biggest upward share-price movements at such a time. From a psychological point of view, investing on good news beats the heck out of investing in beaten-down firms with a diet of bad news. Good news investments often yield faster results, too, rather than waiting for operationally flagging companies to reverse their fortunes, which can take an age. That said, it pays to be nimble about selling when forward earnings’ estimates start to weaken again — let’s not forget that retailing is a cyclical sector.

Strong underlying trading

Unilever’s first-quarter results show turnover up 12.3% but 10.6% of that is due to favourable currency moves. Nevertheless, underlying sales grew 2.8% within which the firm saw emerging market revenue grow 5.4%.

These results are encouraging given that the chief executive reckons a challenging trading environment continued in many parts of the world. Volumes are up 0.9% and, in a sign that consumer spending is loosening, the firm achieved 1.9% of its growth by increasing prices.

Unilever is working hard by strengthening its innovation pipeline, and by increasing investment in core brands. Such focus is meeting more tailwinds than headwinds in the company’s markets, reckons the top man, who expects the firm to deliver further improvement in volume growth in the remainder of the year. 

Profits up

A 5.4% uplift in earnings per share reveals Debenham’s progress in its interim-results report. The firm’s chief executive says the company made good progress against its strategic priorities by improving its multi-channel offer and introducing premium delivery options for important peak periods. A refocusing of promotional strategy delivered a strong increase in full-price sales, an improvement in value-perception, and enabled the firm to end the period with an improved stock position, he reckons.

Despite such operational progress, the company experienced a difficult clothing season in the Autumn, but remains on track to achieve full-year expectations. Over the longer term, the boss reckons Debenhams will drive sustainable growth.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.