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Since the beginning of the year one of the consistent stories in the UK stock market has been the poor performance of the UK retail stocks: there are 50 main market and AIM-listed retailers, between them with a valuation of £68 billion. They have an overall PE ratio of x14, based on aggregate analysts’ forecasts for 2018, with a dividend yield of 2.5%. But are they looking too expensive and should you still be invested in them?

UK retail stocks are looking too pricey

The UK retail stocks that are considered to still be well-positioned in what has become an increasingly tough market are trading at very large earnings multiples, and may well be starting to look too expensive. Among them are French Connection, which is trading at a staggering 2018 PE of x229.5, but there are other offenders out there, including ASOS, Boohoo, Mysale and Just Eat. None of the latter have a PE of under 48. Ouch!

“This suggests that at least some of their future success is already priced in and that can open up downside risk,” explains Russ Mould, investment director at stock broker AJ Bell.

ASOS shares are the latest UK retail stock to be hammered because the stock trades on nearly 60 times forward earnings and investors are looking for upward momentum in earnings forecasts, not just unchanged ones. ASOS can speak about 22% revenue growth in the four months to June, but so what? That seems to be the view of the market, which is looking to see ASOS shares continue to justify that premium rating. It does not mean ASOS has become ‘bad’ or ‘disappointing’ but it IS pricey now. If you are still holding ASOS shares, you may have to start asking yourself why…?

Hard to find value in UK retail stocks

Mould says it may be hard for investors to find value in UK retail stocks from a strictly share price perspective among those who are succeeding. There also seems to be precious little momentum in profits, which could otherwise act as a catalyst for UK retail stocks where there is perhaps some value to be attained.

Look at the top dividend yielders among UK retail stocks and you will see the likes of Laura Ashley (11.2%), N Brown (8.6%), Moss Bros (8.5%) and Card Factory (7.8%).  None of these has a PE above x27.4, although Moss Bros looks the most expensive. Laura Ashley is trading at just x8.9.  If you want a really cheap retailer with a high dividend yield, take a look at Debenhams, now at x5.3 with a 6.8% dividend yield.

However, Mould cautions investors about charging into UK retail stocks:

“Many of these names have already dished out profit warnings, dividend cuts or both and investors will need to tread warily if they are to find a successful turnaround story here, rather than a value trap which looks cheap because it deserves to be.”

Among the UK retail stocks that Mould actually likes is M&S, but that is because there is so much that could be changed, from the company’s web interface to disposing of some of its real estate. Brand loyalty is still there and investors are looking to see how a projected three to five year growth plan is going to pan out.

It’s all in the wage growth

What would be nice for UK retailers is some improvement in real-term wage growth – i.e. after inflation. Retailers cannot rely just on football and sunshine to carry them through, and it may be that a little more spending power from the British consumer may help them forward. But it does sound as if analysts are clutching desperately at straws here in an effort to justifying keeping hold of some of these highly visible brand names. Now that England is out of the World Cup, it may be back to business as usual for UK retail stocks.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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