Hobson: Tesco Will Rally, As Will WH Smith

THE WEEK: Morningstar columnist Rodney Hobson is back on his least favourite subject - retail stocks and their woes

Rodney Hobson 13 April, 2018 | 2:33PM

WHSmith is one of the few retail stocks Rodney Hobson thinks will rally UK shop retailer retail sales

Several retailers were named this week as being the most shorted stocks on the London exchange. This is hardly surprising given the enormous pressures of rising costs and stiff competition at a time when it is very difficult to pass on price rises.

Shop stocks such as Mothercare (MTC) you can well understand being on the list. Although the shares edged up on the latest trading statement, there was really nothing in it to inspire confidence. Total UK sales were down 11% in the latest quarter.

The shares have slumped from 130p to less than 20p over the past 12 months and I cannot begin to make out a case for buying, whether you are a short, medium or long-term trader.

It’s easy to think that in the circumstances there is not much that any human being could do to get retailing on a roll. Yet some people can.

Take Dave Lewis at Tesco (TSCO). His predecessors seemed unable to halt the slide in sales and profits to the point where decline seemed inevitable. Now he has reported pre-tax profits of £1.3 billion and a continuing rise in like-for-like sales despite intense competition. He has reduced net debt yet still found cash to restore the dividend at a modest 3p.

Tesco shares are not cheap after gaining 40% since last June and much depends how well the £4 billion Booker acquisition is handled but who would bet against Lewis pulling this off? Shareholders should resist the temptation to take profits yet.

The woman who showed she could turn around WH Smith (SMWH), Kate Swann, has long since departed but her legacy of closing space on the declining High Street and expanding at thriving airports and stations continues.

Results for the six months to the end of February are not the best we have seen, with pre-tax profits off just under 1%. As usually the culprit was the High Street, where sale dropped 6% on lower book sales at Christmas. However, the business is generating cash to reduce debt further and to fund a 10% rise in the dividend.

The shares perversely fell on the results and I curse myself for not acting swiftly to top up my existing holding. I got in at around £20 and was soon showing a profit. WH Smith is still down about £3 from its year-end peak. I believe it will recover that lost ground before the year is out.

Russian Roulette

Putting a loaded gun to your head and pulling the trigger is likely to end in disaster. Buying shares in Russian companies, even those graced with a presence on the London Stock Exchange, is taking the same senseless risk with your finances.

Do you ever wonder why there are so many Russian billionaires from an impoverished country crippled by sanctions, cursed with a sliding currency and hit by the loss of oil revenues after the collapse of the crude price?

Since the end of the Soviet Union, Russian state assets have been divided up among cronies of first Boris Yeltsin and then Vladimir Putin, cronies who play by Russian and not Western capitalist rules.

One reason why I will not risk investing in BP (BP.) is that it is in a joint venture with Rosneft, having failed to learn the lesson of seeing its Russian headquarters hijacked by its former partners in a previous joint venture.

In this context, the sharp fall and bounce-back in the share price of Russian companies such as Evraz (EVR) this week is merely a distraction. These companies may be at risk of vengeance from America’s quixotic president but the real issue is: can you trust the companies themselves?

I don’t handle loaded guns. I don’t buy Russian shares.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
EVRAZ PLC519.80 GBX-3.31-
Mothercare PLC16.96 GBX-0.12-
Tesco PLC212.40 GBX-0.84
WH Smith PLC2,054.00 GBX0.10-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.