Which will be the top retail pick in 2017?
Happy new year everyone, I hope you all had a good break and did tons of holiday shopping for your friends and family!
Why? Because yesterday marked the beginning of the retail reporting season. And, in the next couple of weeks we're going to see just how much South African's spent at the shops in December.
There is no doubt the market is expecting a super tough Xmas period for the beleaguered retailers, but a positive macro backdrop and fundamentally stronger rand view could lead to a couple of surprises.
The rand's underlying fundamentals are at a turning point and showing signs of improvement. As it stands South Africa has avoided a credit downgrade (for now), interest rates expectations seem to be pointing to a cut in 2017.
The retail sector enjoys a strong rand and if the current ZAR trajectory continues the sector could easily rerate upwards as all the negative news seem to be priced in. It's definitely a sector to have on your watch list!
If we see a sector rotation from resources to retail these JSE stock counters could fly!
In January 2016 we made the call to sell our Woolworths (JSE: WHL) shares and switch to a different retailer The Foschini Group (JSE: TFG).
This tactical change to our portfolio was very much valuation based. We switched from a great quality but extremely expensive retailer (WHL on a 30 Price/Earnings) to an attractively priced solid retailer (TFG at 12 Price/Earnings) as a part of process of de-risking our portfolio in what we thought could be a tough year for expensive shares.
Over the period WHL collapsed a massive -34% while TFG ran +37%. That’s a whopping 71% saving for our clients on the position thanks to one simple switch.
But, in 2017 we see this movie playing out again, only this time it’s in reverse
And, while both are good companies, and even though TFG is well positioned to weather the growing competition of international retailers, our valuation model suggests it’s looking at little full compared to January 2016 prices.
On the other hand, with the 2016 collapse in a quality company like WHL, we reckon there is a compelling case to be made to buy in now. Last year’s switch saved our clients’ huge amounts of money, and we think this year switching back can do the same.
We’ll be running you through our rationale behind this year’s switch in next week’s column. If you’re interested in finding out more about investing with Fleet Street's preferred brokers check them out here.