Competitive pressures will challenge earnings but create buying opportunities
TORONTO, March 26, 2014 /CNW/ - 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, according to CIBC World Markets Inc.
"The past two years have been a rocket ride for Retail and Consumer stocks in Canada," says Perry Caicco, Equity Analyst at CIBC. "The TSX Staples Index has risen 53 per cent, and the Discretionary Index has risen 67 per cent, which is about three times faster than the overall TSX."
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, writes Mr. Caicco in a note published for CIBC's Retail and Consumer Conference happening today in Toronto."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," says Mr. Caicco. "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." He notes that 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. "As quarters unfold, and as the challenges become apparent, multiples are likely to decline. But underneath it all, certain transition activities will begin to bear fruit and there could be some great bargains again among these stocks."