Top tips for investing in the Australian retail sector
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We asked Dean Fergie, portfolio manager at Cyan Investment Management, about the Australian listed retail sector.
What are some of the best performers in the retail sector?
Post the initial drama of Amazon, one of the best results has been from Kogan (ASX: KGN). Despite being right in the firing line from Amazon, they have been the best performing retail stock in the market. They are doing some great things with travel and through mobile but it remains to be seen how they will be affected by such a major player.
Retail as a whole has really been crunched in the past months, we have seen some retailers such as The Reject Shop (ASX:TRS) and Adairs (ASX:ADH) go pretty badly and even more so with some of the fashion retailers. The whole sector has really had a shake up.
Are the fears around the introduction of Amazon valid?
There has been a lot of scuttlebutt around the Amazon announcement and a lot of retailers have taken it quite aggressively but I think it just comes down to the fear of the unknown. Investors can get spooked when they don’t know something and it can have a real effect on the market. We saw it with Brexit and with Trump for instance, where you could see the market sell down aggressively but in the aftermath you realise it was never that bad.
What we are seeing with Amazon is the same as the sentiment around Aldi when it first came to Australia. There was a lot of talk about it in the lead up, but once they were here it took them several years to build up their network and establish their operations.
Is the sector generally a good investment?
Retail as whole has been popular because it an easy sector for people to understand but I think that a lot of the time there is a real crowd mentality.
You get stocks that become a certain size and everyone just wants to buy them because they are big. When cracks in the armour like Amazon roll around, the whole market starts to rotate out of stock and moves on to the next.
Valuations just don’t seem to matter in the short to medium term anymore, its all about momentum. Those on the high side tend to get over bought and it just drives valuations further up. If a stock has the volume and the momentum it can create its own hype and it turns into a snowball effect.
A prime example of this was 1-Page (ASX:1PG) which went from 20c to $5 but never really had the means to justify the dollar valuations.
What retail stocks are on your radar?
Brisbane-based Motorcycle Holdings (ASX:MTO) is a niche business that I think has a lot of potential. They are capped at about $160 mil and in a very fragmented market. They have 25 different stores and their next biggest competitor has only six. With that many locations they have reasonable buying power and it is pretty easy to grow their reach by 50 per cent, much harder than the same outcome for a giant like Woolies or JB Hi-fi.
Afterpay Touch (ASX:AFY) is also trading well and have significantly grown their presence in the past six months.
How do you combat the crowd mentality?
Retail investors simply aren’t doing their research. Go up to any investor in the street and they could tell you what they own and its share price but often they don’t know much more – not even the market cap.
Investors need to ask themselves what they are getting for their money. Whatever the price is, you need to multiple that with the shares on issue to get to the bottom of just what it is worth and whether there is value.
Private investor needs to become more savvy, I think hype influences the market more than professional investors would like to admit.
What advice do you have for the everyday investor?
If you don’t really understand what a business does, don’t invest – it’s like ordering something off a menu in Shanghai when you don’t speak Chinese.
While there are some great biotech stocks and resource explorers you shouldn’t buy stuff you don’t know.
A good place to start is to work out some simple metrics. Work out the overall value by multiplying the shares on issue by the price and then look at revenues, costs and how much cash they have left. Cash flow is where you get a true indication of a company’s status.
Dean Fergie is the Director and Portfolio Manager for Cyan Investment Management.
Dean has more than 25 years experience in the funds management industry covering all major asset classes. Over the past 15 years he has specialised in small cap industrial ASX listed companies. He holds formal qualifications including Master of Applied Finance and Bachelor of Engineering (Civil). Dean has lectured for the Securities Institute of Australia and is a Graduate of the Australian Institute of Company Directors
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.