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Why I’d Buy WM Morrison Supermarkets PLC Before Poundland Group PLC And Signet Jewelers Limited

When it comes to the worlds of business and investing, nothing stands still. In other words, a product that is popular today may be superseded tomorrow by a different product that is cheaper, simpler and more appealing to customers. Similarly, an industry that has posted strong growth for a number of years may fail to live up to expectations as a result of a shift in the macroeconomic outlook.

In fact, that’s the current situation facing discount stores such as Poundland (LSE: PLND). They have enjoyed stunning growth rates in recent years, as Britain has become a nation of bargain hunters, with consumers seeking out the cheapest, most heavily discounted items.

This, of course, is understandable, since inflation has outstripped wage growth for a number of years, thereby reducing consumer spending power in real terms. Furthermore, the so-called ‘age of austerity’ has also caused the nations psyche to shift towards an attitude of ‘less is more’ and a pullback from the free-spending, debt fuelled consumption of the early 2000s.

Looking ahead, though, this is changing. Household budgets are not under the same pressure as they have been in recent years, with inflation teetering around zero and wage growth being positive. And, with more people in jobs than ever before, consumer confidence is increasing. In time, this is likely to cause people to shop at discount stores such as Poundland a whole lot less and begin to return to the mid-price point stores that have endured such a challenging period in recent years.

One such company is Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US). Its sales have been under considerable pressure in recent years and, while the grocer has attempted to play catch-up in the online and convenience store spaces, the changing of its senior management team shows that its strategy has ultimately been unsuccessful.

Part of that, though, has been due to extremely unfavourable trading conditions, with that situation now likely to change. In fact, Morrisons is expected to return to bottom line growth as soon as next year which, alongside a new strategy from its recently appointed CEO, could provide a significant stimulus to the company’s share price. Moreover, with Morrisons having a price to book (P/B) ratio of just 1.2, it appears to offer excellent value for money at the present time, too.

Of course, other retailers such as Signet Jewelers (LSE: SIG) offer much more reliable earnings growth than Morrisons.  For example, Signet’s bottom line has grown in each of the last five years, thereby showing a level of consistency that Morrisons simply cannot match. And, with Signet’s earnings due to rise by 40% in the current year, followed by growth of 19% next year, it trades on a price to earnings growth (PEG) ratio of just 0.6. This indicates that its shares offer high growth at a low price and, as such, offer excellent long term growth potential. Furthermore, Signet is also more regionally diversified than Morrisons, with it operating in North America and the UK, versus Morrisons’ UK-centric business model. This should provide even greater consistency in the company’s earnings profile moving forward.

However, with Morrisons also having a very low PEG ratio of 0.7, it has the potential to benefit from an economic tailwind that, alongside a new strategy, could cause investor sentiment to shift from negative to positive. And, as highlighted, its shares are cheap based on their P/B ratio and, as a result, have, in my view, more upside potential than either Signet or Poundland.

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