A Tale of Two Retail Stocks

THE WEEK: Morningstar columnist Rodney Hobson looks at one retailer whose shares have jumped nearly 50% - and another whose fortunes have halved

Rodney Hobson 15 September, 2017 | 3:44PM
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Something rather curious happened at Associated British Foods (ABF) this week. The shares fell 5% after an update that I read three times looking in vain for nasties.

Now I’m not a great fan of the company, which has seen too many ups and downs for my liking. I really don’t see how the Primark clothing chain fits in with the food; the food side is too prone to the pressures of consumer price resistance; and Primark, although once again powering ahead, had an uneasy setback last year.

However, the latest update was even better than the one in July and operating profit for the year just ended is well ahead of expectations. Primark in particular has bounced back strongly. The effects of sterling devaluation have roughly balanced out, making figures easier to compare.

The shares have risen from £23.60 at the beginning of February to £33.23 at the start of this month so it is not entirely surprising that they ran into profit-taking. I’m not interested personally but it goes to show that on the stock market opportunities present themselves when you least expect them. Keep your eyes peeled.

Dunelm Can’t Shrug Off Share Slump

Retailer Dunelm (DNLM) is one of those companies I would like to say something nice about but can’t quite bring myself to do so, at least not as far as buying the shares is concerned. I certainly can’t say that the latest results justify the remarkable 9% rise that greeted them.

Figures for the 52 weeks to 1 July were distorted by the acquisition last November of Worldstores, which ran up a £10.7 million loss. Even without this, however, Dunelms profits were squeezed in the tough market for household goods and furniture.

Dunelm has admittedly made an encouraging start to the new financial year with like-for-like sales growth over the past two months, although that was down at least in part to more favourable weather conditions. The board is sufficiently confident to propose a dividend increase.

I just feel an awful lot is riding on the Worldstores acquisition coming good and there is little tangible evidence to show that is happening yet. I don’t feel confident when a senior director steps down without a replacement, as chief executive John Browett did last month. No successor has yet been found.

The shares slumped from over 900p a year ago to 550p in July before steadying of late. If the company comes good, as I hope it will because I have bought stuff there, all the lost ground will be recovered. The if is just too big for me by a wide mark.

An Ill Wind Blows Some Investment Good

One hates to talk about profiting from human misery but this is an investment column and hurricane Irma brings warnings and, dare I say it, opportunities.

I never invest in insurance companies, especially those that cover catastrophes, because the whole industry is too cyclical. Any insurer or re-insurer caught up in the storm will probably initially underestimate the extent of the pay-out, which will drag on for two or three years. That may scare weaker insurers out of the market and premiums will thus be able to rise but that opportunity is some way down the road. If you are interested in the sector, let the dust settle. Shares could have some way to fall.

Oil explorers, on the other hand, will benefit from any rise in the price of oil, although the gain is likely to be short term. There are plenty of producing nations only too eager to fill any shortfall.

Plant hire group Ashtead (AHT) should be a big gainer, and over a longer period, as its US operations will be in demand during the clean-up in Florida and other Gulf states.  The shares are admittedly at a peak but I see them pressing on to new highs over the coming months.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

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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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Ashtead Group PLC5,422.00 GBX-1.35Rating
Associated British Foods PLC2,483.00 GBX-0.40Rating
Dunelm Group PLC1,036.00 GBX-0.77

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.

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