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Senin, 19 September 2011 | 02.59 | 0 Comments

A cheap retail stock to buy now

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19 September , 2011
  • A cheap retail stock to buy now
  • Recommended article: 14 stocks to buy as East overtakes West
  • Friday’s close: FTSE 100 up 0.6% at 5,368... Gold up 1.3% to $1,811.88/oz... £/$ - 1.5791
From David Stevenson, across the river from the City

Dear Golden Jann,

David Stevenson A quick note before we get on to today's email. 

Later today, you’ll be able to get your hands on a special report from our colleague Simon Caufield. In it Simon explains what he believes is the best strategy for creating wealth in the long run – the strategy behind his True Value newsletter.

When we first published Simon’s ideas over a year ago, the response was huge. We’ve only opened up places twice this year, and on both occasions we’ve been inundated. The good news is that places are now available again, so you can find out for yourself why Simon has proved so popular. 

But the doors will only be open for 72 hours. So do keep an eye on your inbox this afternoon. 

Now back to today...

Are things looking up for retailers?

Despite the current grim state of the high street, updates from some of our big retail chains revealed glimmers of optimism last week.

And in East London last week, shoppers flocked to the grand opening of Europe’s largest urban shopping centre as if they’d never heard the word ‘recession’.

Could it be a sign of things to come? If so, and a recovery is around the corner, share prices in the general retail sector would look cheap.

So is it time to pile back in?


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Find out how we believe you could protect your money – and even profit.

In this URGENT report from The Fleet Street Letter

The Fleet Street Letter is a regulated product issued by MoneyWeek Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. 0207 633 3780.

The UK high street is still in the doldrums

British retailers are having a miserable summer, no doubt about it. In August, sales volumes – ie the actual quantity of goods sold – were completely flat year-on-year, according to official figures. The latest British Retail Consortium figures were even worse. On a like-for-like basis, sales are down 0.6%.

Sure, the riots in August didn’t help. But it’s clear that British consumers are no longer the engine of growth they once were. One of the main reasons for this has been the rising cost of living.

Things we need – like food and fuel – have been soaring in price, and our wages haven’t kept up. So more money being spent on essentials means less spare cash to spend on the high street.

As Samuel Tombs at Capital Economics puts it, “August’s retail sales figures have provided further evidence that high inflation is killing off any hope of a recovery on the high street”.

But is the outlook really that gloomy? Not according to high street bellwethers, John Lewis and Next. Both have suffered as a result of the downturn. John Lewis saw profits fall by 18% year-on-year for the six months to the end of July. Meanwhile, Next saw profits rise by 8.5%, but sales at its UK store were down by 1.8%.

However, both firms reckon UK inflationary pressures could abate next year. That would give consumers some breathing space. According to Next, in 2012, “things are going to get a little easier… it seems reasonable to assume that by the second quarter we will begin to see some recovery in the consumer environment”.

Falling inflation would come with a catch

Are they right? We wouldn’t be so sure. The great British public – whose track record on forecasting inflation is a lot better than the Bank of England’s – doesn’t expect price rises to ease up any time soon, as we noted last week: Watch out – inflation is only set to get worse. As long as they keep expecting higher prices, they won’t be in the mood to splash out.

However, even if inflation were to fall back, we wouldn’t bet on it being good for the high street. It’ll most likely be because demand has dropped, and the rest of the economy is heading back into a slump.

Already unemployment is rising again. In the three months to the end of July, the number of people in work dropped by 69,000. That was the first such fall this year. With the government’s austerity programme set to bite in earnest, there will be more public sector job losses.

On top of that, banks (even the ones that have avoided rogue trader scandals) are rapidly shedding staff. And economic turmoil in the rest of the world can’t be good for Britain’s private sector either.

In short, Next and John Lewis sound like they’re clutching at straws. As Tombs puts it: “The latest news on the labour market showed that the fading economic recovery is starting to impact on employment, and suggested that the renewed downturn in consumer spending is likely to deepen in the coming months”.

One chain that’s worth buying

Don’t get me wrong. It’s easy to be tempted by general retail stocks. They’ve underperformed the market by around 15% over the last two years. That makes them look like a ‘recovery’ play.

And that’s what’s so risky about them. The chances are that the sector could still have some way to fall.

So if you’re looking to buy a retail stock that’s taken a pounding in the recent market sell-off, why not stick to the tried and trusted?

We’ve written about supermarket giant J Sainsbury (LSE: SBRY) before so I’ll not repeat all the details here. But it’s a great defensive stock. It’s trading below its stated net asset value for the first time in ages. And on a current year p/e of just over 10, and a prospective yield of 5.7%, it’s now looking very cheap.

Got a comment on this article? Leave a comment on the MoneyWeek website, here.

Until tomorrow,

David Stevenson

Associate editor, MoneyWeek

Our recommended article for today...

14 stocks to buy as East overtakes West
- MoneyWeek's experts look for investment opportunities as the balance of power switches from East to West, and pick 14 stocks to buy now: 14 stocks to buy as East overtakes West.

And for Friday’s market update, see below...


EXPOSED: The Four Big Threats to Your Wealth in 2011

Four major financial shocks could hit Britain in the very near future.

If you have any money tied up in investment property, stocks, Europe or government bonds... I recommend you watch this video right now.

Be warned: this won't make for easy viewing.

MoneyWeek magazine is an unregulated product published by MoneyWeek Ltd.

Market update

Click here for the latest stock market news and charts.

The FTSE 100 ended last week with a fourth straight day of gains on Friday. The index closed up 0.6% at 5,368, and was up 3% over the week.

Banks were mixed. Barclays and RBS were among the better performers, up 3.4% and 2.3% respectively, and HSBC added 0.7%. But Standard Chartered lost 0.2% and Lloyds fell 0.3%.

Highest climber of the day was Inmarsat, which gained 6.9%; and the day's biggest faller was engineering group IMI, which lost 3.2%.

In Europe on Friday, the Paris CAC 40 slipped 14 points to 3,031, but the German Xetra Dax was 65 points higher at 5,573.

In the US, the Dow Jones Industrial Average added 0.7% to 11,509, and the S&P 500 and the Nasdaq Composite each rose 0.6% to 1,216 and 2,622 respectively.

In Japan, markets were closed for a public holiday. In China overnight, the Shanghai Composite fell 1.8% to 2,473, and the CSI 300 lost 2% to 2,679.

Brent spot was trading at $113.85 early today, and in New York, crude oil was at $86.69. Spot gold was trading at $1,824 an ounce, silver was at $40.51 and platinum was at $1,816.

In the forex markets this morning, sterling was trading against the US dollar at 1.5739 and against the euro at 1.1496. The dollar was trading at 0.7304 against the euro and 76.81 against the Japanese yen.

And in the UK, property asking prices in the UK rose 0.7% in the last month, according to Rightmove. The average asking price now stands at £233,139. But in London, asking prices climbed 2.4%, with the average now standing at £427,889.

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