It is no secret that the retail sector is an absolute disaster this year. By all rights, it should be. Consumer spending has been relatively weak and most of the dollars spent have gone to everyday items. People are buying the have-to-have items and skimping on the want to have discretionary spending. They are also being very cost conscious, with those stores that specialize in discount or bulk items showing sales increases, while the specialty retailers have suffered dramatic sales declines so far in 2008.It is hard to get excited about shopping for a new suit, arts and crafts, or toy for the kids when you are trying to decide between paying the mortgage or buying food with this week's paycheck. The stocks of many of these have been absolutely pummeled, dropping more than 50% in some cases. This may present an opportunity for long-term investors who are aggressive in nature. A look at what's going in retail shows us that it really is bad right now. Consumers have been hit by a tidal wave of problems this year. Fuel and food prices are up substantially. Increasingly larger percentages of shopper's paychecks are going to the gas station and supermarket. For many, their mortgage has reset to higher payments, even as their house declined in value. Unemployment is rising and few new job opportunities are being created in the tight credit environment. To make matters worse, savings in the United sates is pretty much zero, so there are no reserves upon which to draw. The standby for the last decade of refinancing the house to free up cash is no longer an option. These are not the conditions that make you want to jump into a car and head to the mall on a shopping spree. Interest-rate cuts have not helped, nor have tax-stimulus checks. Consumers are scared, and scared people do not shop. According to some industry groups, mall traffic is down 14% in 2008, and it is even worse for apparel stores.
How to Find Cheap StocksTo better understand why I think this should be an opportunity in what is, at best, a difficult time for retailers, you should understand that I consider myself one of a handful of true Ben Graham style investors still practicing the method. I look for stocks that are cheap, primarily based on asset and enterprise value (EV). Stocks do not trade cheaply because business prospects are wonderful. I leave those stocks for my friends who trade momentum and growth stocks. Most of what I like is unloved and has at least some operating difficulties. I ask myself four questions when I look at a stock.
- Is it cheap?
- Why is it cheap?
- Can it survive?
- Has anybody noticed besides me?