3 Undervalued Retail Stocks

THE VALUE INVESTOR: These three undervalued retailers could benefit from a festive boost in revenues as Christmas shoppers drop cash online and in stores 

Emma Wall 12 December, 2014 | 12:04AM
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This article is part of Morningstar's Guide to Financial Christmas Gifts. As you consider whether your friends and family have been naughty or nice we'll be revealing all you need to know about financial gifts for Christmas.

Christmas shoppers have only two weekends left to hit the high-street and snap up presents for under the tree. Those who prefer to peruse festive fancies online from the comfort of their own home are equally running out of time – as the closer to December 25 we get, the trickier it is to guarantee postal deliveries.

As we rush to tick grand-children, aunts and spouses off our Christmas lists, the investors among us may stop and think exactly whose pocket their Christmas pennies are lining.

From the Black Friday sales through the pre-Christmas dash, Boxing Day sales and New Year offers, retail companies see revenues rise considerably at this time of year. While the challenge of e-commerce has seen many traditional high street retailers such as JJB Sports, Woolworths and HMV go bust, those that have weathered the storm and expanded online are riding high. Companies such as Next (NXT), who have seen their share price steadily rise over the past five years.

The trick is to identify those retail stocks who equity analysts consider to be currently undervalued, and buy in the hope that over the medium term the market corrects this price differentiation.

Using Morningstar Select we screened for retail stocks with a four or five star rating – meaning that they are trading at less than Morningstar equity analysts’ fair value estimate for that stock.

Amazon (AMZN)

Amazon has played a prominent role in the structural shift away from brick-and-mortar retail, and it may lay waste to several other retailers in the years to come. Without the cost burden of physical stores, Amazon can price below traditional rivals and drive recurring traffic online.

Even with online sales tax collection, analysts believe Amazon can maintain its value proposition through other means, including adjustments to shipping policies or Amazon Prime. Aided by the network effect inherent in 260 million active users and recent fulfilment infrastructure, technology, and content investments, Amazon owns one of the wider economic moats in the consumer sector and is likely to remain a disruptive force in retail, digital media, and cloud computing.

Kingfisher (KFG)

There is a lot for long-term investors to like about Kingfisher. A decade ago, the company was a multi-category retailer; an ineffective conglomerate of primarily no-moat businesses. Today, it is focused solely on the home improvement space, and analysts believe management is building upon some competitive advantages that are likely to sustain the company's excess returns on capital through the major secular challenges that traditional retailers currently face. Morningstar believes the strategy to sell common products across its banners will allow Kingfisher to finally exploit its scale and help strengthen the company’s economic moat as one of the cost leaders of the industry in Europe.

Swatch (UHR)

Swatch Group has evolved into the world's largest and most diverse manufacturer, marketer, and distributor of timepieces, managing a portfolio of watch brands in addition to its global namesake brand and supplying components to the Swiss watch industry. It has created a vertically integrated structure, controlling each aspect of the design, procurement, manufacture, and assembly of its products. Fashion and engineering drive the firm's culture in equal parts, and continued innovation permeates the entire portfolio of 20 watch brands.

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.

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About Author

Emma Wall  is former Senior International Editor for Morningstar