A time to buy retail?

Release Date: 2008/04/24

RMB Morgan Stanley CEO says look past the banks to this “underappreciated” defensive retailer

As many fund managers are singing the praises of bank stocks, some are looking beyond financial shares to those in the retail sector.

The jury is still out as to whether ailing consumer stocks have turned the corner. But one thing's for certain: many retail stocks are a lot cheaper than they were six-to-12 months ago, and some investment professionals are starting to sniff around the sector.

RMB Morgan Stanley CEO Chris Meyer says: "I actually think that the trade to put on is buy the retail stocks which are probably even more beaten up and still sell the banks."

Speaking on CNBC's power lunch with Moneyweb, Meyer said the price:earnings (PE) multiple for South African retailers is about half that of other emerging-market retail stocks. However, the historical discount is only about 15%. "So you can see how depressed that sector is," he says.

"The banks, however, trade at about parity on a PE multiple basis relative to other emerging market banks, compared to their history. So the banks are not as cheap as they first appear," he warns.

Meyer is not the only professional investor to seek value in the retail sector. Investec's John Biccard - one of the top performing asset managers over a five-year period - was one of the first to buy into weakness in credit retailers, a move that doesn't look too inspired in hindsight.

And as stocks have fallen further, others too are getting excited. Speaking on Moneyweb Radio last month, RE:CM's Piet Viljoen said there "are a number of retailers that are starting to look attractive".

Meyer says his favourite retail picks are Massmart (JSE:MSM) and New Clicks (JSE:NCL).

"Massmart because we think it's a stock for all seasons, says Meyer. "They are pretty defensive in a downturn." He notes Massmart's alcohol component has defensive qualities, but that other parts of the business, such as Builders Warehouse will benefit if the economy does recover and interest rates come down.

Massmart is 29% off its 12 month high. It has a historic dividend and earnings yields of 5% and 8% respectively.

Meyer says he thinks New Clicks's defensive properties are underappreciated by the market.

Defensive counters such as Spar (JSE:SPP), Shoprite (JSE:SHP) and Pick n Pay (JSE:PIK) have significantly outperformed other retailers (see: In bear territory).

"New Clicks trades at a big discount to the food retailers, but we think it's got as much growth as those companies," notes Meyer. "It's got a big healthcare component which is very defensive in what's going to be a tougher economic environment over the next 12-18 months."

New Clicks is 25% off its 12-month high. Its dividend and earnings yields are respectively 3,6% and 8%.