10 top retail stocks…and Debenhams

Britain's retail sector is in turmoil, but Stockopedia's Ben Hobson has spotted great opportunities.

Some of the better performing shares here include the likes of Dunelm (LSE:DNLM), Shoe Zone (LSE:SHOE) and JD Sports (LSE:JD.). Others like ScS (LSE:SCS), Next (LSE:NXT) and WH Smith (LSE:SMWH) have also maintained a performance edge over the market during the past year.

Together, these stocks have the best blends of quality, value and momentum. But you can see from the individual ranking scores that most rate pretty well for their quality. As a result of being high quality, they tend to attract higher valuations, which is why the Value Ranks are generally more modest. But striking a balance between quality and value is precisely the kind of "Warren Buffett approach" to investing that can pay off handsomely well into the future. 

By contrast, Debenhams' (LSE:DEB) low quality, low momentum ranking scores point to something a bit different - the classic signs of a value trap.

The future for retail investing?

Take a look at the financial headlines and you'd be forgiven for thinking that UK retail is a sector in peril. Expensive leases, margin pressure, online competition and even Brexit are reckoned to be serious threats to some of the high street's best-known names.

But it's also true that retail has been the source of some brilliant success stories in recent years. Investors have made a lot of money from this sector and new names continue to join the market. 

Businesses that are out of touch with customers or are hanging on to outdated models have faced serious problems. But those that are well positioned, know their customers and adapt to changing buyer trends have been some of the best performing stocks in the market. This could well be an opportunity for investors prepared to roll up their sleeves and have a closer look.

News that Mike Ashley's Sports Direct group (LSE:SPD) is weighing a bid for the troubled retailer Debenhams won’t come as much surprise to onlookers. With a 29% stake, Ashley is Debenhams' biggest shareholder, but the group's fate is far from clear. Debenhams is labouring under sizeable debt, and its lenders could eventually end up calling the shots (whether Ashley likes it or not).

The situation at Debenhams is extreme but symptomatic of the problems faced by many UK retailers. Traditional bricks and mortar stocks have long complained about the challenges of high rents and margin pressures caused by fierce online competition. Investors in the sector are well versed on how these factors can destroy margins… and even whole businesses.

One of the longest retail deaths in recent years has been HMV, the music and film chain. Back in 2013 the group slipped into administration and the PLC was liquidated a year later. But part of HMV lived on and some of its stores were acquired. But the new outfit went bust again last year, partly because it still couldn’t negotiate itself out of expensive store leases. 

Meanwhile, news of struggling chains (both private and public) either attempting turnarounds or sinking completely, still to make headlines. They've included the likes of New Look, Toys R Us, House of Fraser, Marks & Spencer (LSE:MKS), Patisserie Valerie (a fraud), Maplin, Carpetright (LSE:CPR), Homebase and Mothercare (LSE:MTC).

A more recent bust-up has been Julian Dunkerton's effort to get himself back in control at the fashion retailer Superdry (LSE:SDRY). Since stepping back from the business last year, Dunkerton has watched the chain's valuation tumble. But he and co-founder James Holder still hold a 29% stake and Dunkerton is keen to press his own strategy back on the business.

But aside from these examples, is it all bad news?

Look at the share prices of some of the best-known quoted retailers in the stock market and you'll find a mixed picture. It's clear that in some cases, retailers have performed very well over the past year. In fact, investors in predominantly online firms like Boohoo.com (LSE:BOO), ASOS (LSE:ASC) and Ocado (LSE:OCDO), will vouch for the fact that retail stocks can deliver stellar returns.

There are currently 51 stocks quoted in the "Specialty Retail" and "Diversified Retail" industries of the London Stock Exchange. As well as high street names, those groupings include car dealers, which have a slightly different investment profile. 

As for the rest, this week we've pulled together the highest-ranking stocks based on their exposure to Quality, Value and Momentum. In each case, the higher the ranking position (up to 100) the higher the exposure.

Source: Stockopedia

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