Mr. Market, Value Investing and the Death of Retail

06/28/2017 2:54 am EST

Focus: CONSUMER

Charles Mizrahi

Editor, Park Avenue Investment Club and Inevitable Wealth Portfolio

Depending on which estimates you read, there will between 7,000 to 10,000 retail stores closing this year, and those stores won’t be replaced anytime soon, says Charles Mizrahi, editor of Insider Alert.

The retail industry is under attack; some would say it’s in a death spiral. In addition to the industry being disrupted by Amazon (AMZN), there are just too many retail stores to begin with.

chart 1

America is overstored. In the United States, there are 7.3 square feet of retail space per capita. Compare that with 1.7 square feet per capita in Japan and France, and you could see the extent of the problem. The second major problem is Amazon. Simply put, people are buying online more than they used to.

Easy return policies, free shipping, lower prices, and larger selections make it very hard for brick-and-mortar stores to compete. Since 2010, mobile commerce has grown from 2% of digital spending to more than 20%, and it’s continuing to grow.

chart 2

Many stocks in the retail market have taken it on the chin. Mr. Market has been marking down the prices of stocks across the sector. Macy’s (M) plunged 34%, Target (TGT) is down 24%, and Kohl’s (KSS) is off 21%, all since the beginning of 2017.

While the retail industry is under attack, not all retailers are created equal. Like in every industry, there are stronger and weaker companies.

When Mr. Market starts to mark down stocks across the board, that’s when we roll up our sleeves and find the ones that don’t deserve to be selling for pennies on the dollar.

Every year, there is always a sector that is out of favor with Mr. Market. A few years ago, it was the semiconductor industry, followed by energy, and now retail industries that were being sold off by investors.

It’s always when pessimism is at its worst that sentiment starts to turn around, and there is a dark cloud hanging over the industry.

That’s why it might surprise you that our latest addition to the Insider Alert portfolio is American Eagle Outfitters (AEO), which has been caught up in the “death of the shopping mall” narrative.

The company was founded in 1977 and has been through tough times before. While other retailers are being forced into bankruptcy, AEO has been holding up well, all things considered.

Keep in mind that we are not making a long-term prediction on where the retail industry will be a year from now or the future of AEO. We added AEO to the portfolio because Mr. Market was offering the stock to us at what we believe to be a discounted price.

In addition, the Insider Alert portfolio has three other retailers: apparel retailers Michael Kors (KORS) and The Buckle (BKE) and specialty retailer GameStop (GME).

They were all added to the portfolio, not based on our timing of the retail cycle, but based on their bargain prices and rock-solid balance sheets.

How long will the current downturn in the retail cycle last and which companies will survive? We don’t have a clue. But what we do know is that if we continue to buy financially sound companies at bargain prices, we will have many more surprises to the upside than the downside.

Subscribe to Insider Alert here…

Related Articles on CONSUMER

Keyword Image
Signet Jewelers: A Value Gem?
12/04/2017 5:00 am EST

Signet Jewelers Limited (SIG) is a retailer of diamond jewelry; its segments include Sterling Jewele...

Keyword Image
Wendy's: Burgers and Buybacks
11/30/2017 5:00 am EST

We have bought The Wendy’s Co. (WEN) three times in the last 3 years, notes David Fried, a spe...