After a two-year rocket ride for retail and consumer stocks, outsized returns will be hard to find in 2014 but there could be great opportunities for bargain-shopping investors, says CIBC World Markets.
“The TSX Staples Index has risen 53%, and the Discretionary Index has risen 67%, which is about three times faster than the overall TSX,” says Perry Caicco, equity analyst at CIBC.
But the fuel for those increases, namely rampant M&A activity, real estate spin-offs into REITs and investor focus on stable cash-producing consumer names over resource stocks, has largely dissipated, says Caicco.
“2014 is shaping up to be a year of digestion and transition, as companies absorb acquisitions, shift strategies and rebuild their bases all while the competitive landscape remains on fire,” he says. “As a result, we do not see foresee outsized returns in the retail and consumer space this year, and have encouraged investors to focus on either high-growth companies, or more traditional companies where management is actively driving value.”
Earnings for many companies in the retail sector will be challenged this year due to a weak Canadian dollar, debt-conscious consumers, and square footage growth that has intensified competition and squeezed margins. “But underneath it all, certain transition activities will begin to bear fruit and there could be some great bargains again among these stocks.”
Walmart and Target will be aggressively pushing for sales this year, and their competitors will have to respond or see revenues erode, he says. New contenders Nordstrom and HBC’s Saks operation, and further pressure from TJX, which operates Winners, Marshalls and Homesense, will also keep pressure high, he adds.
Caicco believes that e-commerce could more than triple its share of Canadian retail sales, growing to 5% by 2020, from 1.5%today.
Companies in significant transition, either due to asset integrations or changes in market dynamics, include all grocers as well as Maple Leaf Foods, HBC, Aimia, Tim Hortons, Bauer, Whistler Blackcomb Holdings and Dorel. “Earnings results are likely to be unstable” in the period ahead, says Caicco.
“Even the slightest stumble (or modest disappointment) can send stocks down sharply. We have already seen evidence of that behavior at Loblaw, Empire, Metro, Aimia, RONA and Dorel.”