I have a funny feeling that many people are missing out on terrific investments in a well-known industry, simply because they're afraid.
When it comes to fear, I suspect that only the financial industry can currently rival the dread surrounding the retail and consumer goods sector. Even if unbridled consumerism is getting a bit more bridled these days, there are still tempting chances to profit here.
I'm not scrambling for my rose-colored glasses here. I understand that a lengthy glut of consumer spending has left the economy with a giant hangover, making stocks that deal with discretionary purchases a lot more worrisome than they were just a few years back. However, even in a consumer-led economic downturn, I think selling -- or avoiding -- all retail stocks is a huge mistake, leading many investors to miss out on some great opportunities.
Is retail really so last year?
I'm sure you've heard many investors talk about finding safe haven in consumer staples like Kimberly-Clark (NYSE:KMB), stalwart blue chips like Coca-Cola (NYSE:KO), or commodities, or even gold. But retail sounds like the last place anyone would want to be, right?
Let's ask the great investor Warren Buffett: "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."
In that spirit, I'd say a sector as widely feared as retail is right now probably presents some great bargains for patient, long-term investors with an eye for quality.
The quest for quality
I'm not advocating that investors load up on all the retailers they can think of, assuming they're all cheap. Some deserve their ongoing beatings, and several may not even make it out of the current crisis. (Don't forget to do your due diligence, people!) Retailers with brutal competition, mounting losses, and onerous debt loads do sound like poison to me.
Still, high-quality, beaten-down consumer-oriented stocks are out there. Consider Whole Foods Market (NASDAQ:WFMI) and Volcom (NASDAQ:VLCM). Given the macro climate, the short term may be rough for both, but I still believe they're solid, well-run companies with great competitive advantage, stellar brands, and plenty of growth potential. Both are also trading well off their historical highs. Whole Foods sells for 25 times this year’s expected earnings, with a PEG ratio of 1.24; Volcom fetches just 16 times earnings, with a PEG of 0.71.
I believe this is a great time to buy these stocks (or pick up some more). To explain why, we'll turn once again to Warren Buffett: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
Contemplating a decade of holding is a smart way to approach such choices. In that vein, personally, I wouldn't feel comfortable with the idea of being stuck with retail stocks like RadioShack (NYSE:RSH), Circuit City (NYSE:CC), or Talbots (NYSE:TLB) for 10 years. Goodness knows what will happen to them in a decade's time. They've already got plenty of competition, and they're struggling to turn themselves around even now. However, I believe Whole Foods Market and Volcom will remain healthy and innovative for years to come.
Bargain-hunting without the crowds
Those are just two examples of retail stocks I think look great (and reasonably priced) for long-term investors. There are plenty more beaten-down stocks with bright futures currently trading at a discount. Finding them is simply a matter of separating the wheat from the chaff -- and ignoring others' fears that there's nothing but chaff out there.
Unfortunately, while we all logically know that it's best to invest when everyone else is fearful, it's still hard to overcome the fear surrounding bargain-laden sectors. But in times like these, finding quality companies at low prices for long-term gains is more relevant -- and should be more lucrative -- than ever.
Sounds like it's time to go shopping.
Stock up on further Foolishness:
- In April, I warned not to buy certain retail stocks.
- Last November, I had some ideas on how to avoid retail disaster in 2008.
