Concerns about inflation and the possibility of an economic slowdown have hit retailers this year. However, JP Morgan argues that for many stocks, bad news is already priced in.
SPDR S&P Retail
the exchange-traded fund (ticker: XRT) is down more than 21% this year. Although retailers across the board had a fairly strong fourth quarter, with many providing upbeat comments about the year ahead, investors have been spooked by a number of factors. Inflation is reducing the purchasing power of customers at a time when people are more willing to spend on services, such as dining out and vacations, than on the goods they accumulated during the lockdown.
Still, the market may be too down for the group, argues JP Morgan’s Matthew Boss. He writes that while the headlines are worrying, there are reasons to be optimistic that consumer spending won’t slow dramatically. Not only is unemployment at its lowest point in nearly two decades, but wages have been rising, though not as fast as inflation. In addition, the household debt service ratio is at its lowest level in 40 years and household savings rates are above average.
Of course, the possibility of a recession remains a concern for the group, but here again Boss argues that the shares have been sold too much, given that a “recession [is] more than valued in the sector today”.
Using a 2001 baseline of same-store sales and margins, he estimates that if retailers behaved as they did during that recession, it would equate to earnings per share of $4.94 for the group, about 3% above earnings per share. $4.79 in EPS they earned. they seem to be currently pricing, based on bottom-line price-earnings ratios.
Overall, he estimates that more than 60% of the retailers he covers are already pricing in a 2001-like recession. That means the earnings portion of the price-earnings ratio still has room to rise, even with economic winds. Against In addition, many companies have structurally improved their businesses since the pandemic, another catalyst for the expansion of their multiples.
As for specific companies, using their 2001-era model shows that
American Eagle Providers (OAS) and
Victoria’s Secret and company. (VSCO) may have been more oversold, along with
Ross Stores (ROST), and
bath and body work (BBWI). Rather, he points to Gap (GPS) and Dillard’s (DDS) as having the biggest downside risk to stocks in his downturn scenario.
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