According to various newspapers, retailers in the UK are at their most optimistic in thirty years. As such, many investors may feel that now is a great time to increase their exposure to the sector, with an improving UK economy, deflation and increased consumer confidence having the potential to push profitability and investor sentiment in the sector much higher. Are these three stocks the best way for you to benefit?
Sainsbury’s
While retailers may be optimistic, supermarkets such as Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) are most certainly not. That’s because the price of food is still falling, which is leading to reduced sales and falling margins across the sector. Furthermore, shopping habits are changing, with the large, out-of-town developments that were once popular now becoming obsolete as shoppers favour convenience stores and online.
Despite this, Sainsbury’s remains a hugely appealing investment opportunity. Certainly, things may get worse before they get better, but the company’s valuation appears to take this into account. For example, Sainsbury’s trades on a price to earnings (P/E) ratio of just 11.9 which, when you consider that the FTSE 100 has a P/E ratio of 16, indicates that an upward rerating could be on the cards. Furthermore, with a yield of 4.1%, Sainsbury’s remains an attractive income stock that could deliver strong total returns even if the supermarket sector continues to disappoint.
ASOS
One company that is set to benefit from an upturn in consumer spending is online fashion retailer, ASOS (LSE: ASC). That’s because, while it has expanded internationally in recent years, the UK remains its key market both in terms of sales and, perhaps most importantly, in terms of profitability.
In fact, ASOS is continuing to invest heavily in pricing in its international markets. This is a sound strategy and should allow it to build a robust customer base much quicker and improve its competitive position. The problem, though, is weaning itself off lower international margins, with price increases unlikely to be welcomed by consumers.
Still, ASOS is expected to increase its bottom line by 26% next year, although with its shares trading on a P/E ratio of 87, it still seems overvalued at the present time.
Sports Direct
While majority shareholder in Sports Direct (LSE: SPD), Mike Ashley, may get more headlines than the company, it remains a very appealing investment at the present time. In fact, Sports Direct is a rather unusual retailer, since it appears to perform equally well in a downturn as it does in an upturn, which is a very appealing quality.
For example, its relentless focus on price means that, in recent years, shoppers have flocked to its stores as consumers have become increasingly price conscious. Now, with disposable incomes on the rise in real terms, Sports Direct looks set to benefit from increasing margins and a growing bottom line. In fact, it is expected to post earnings growth of 16% this year and, with it having a price to earnings growth (PEG) ratio of 1, it seems to be well worth buying.