The last three years have been a rotten time for Aussie retailers.
Sales are down.
Shoppers are buying stuff online.
Some retailers are even going bust – the Darrell Lea chocolate stores are a recent example.
And according to a report on Finance News Network:
‘Gerry Harvey has warned the first half of next year is going to be extremely difficult for retailers. [He] says while hot weather could provide a boost to Christmas sales he has never seen as many retailers under pressure over his 50 years in the industry. Mr Harvey has also cautioned many retailers are at risk of going bust in the New Year but vowed Harvey Norman Holdings will hold up to be the last man standing.’
Things don’t look good for the Aussie economy. Must be time to pack your bags and sell out, right? Maybe not…
We’ll admit we’ve given Gerry Harvey a hard time in the past. And we still believe the Harvey Norman [ASX: HVN] franchise business is a business model from the 1970s-1990s…a business model that’s looking out-dated.
Now, that’s not to say the Harvey Norman business can’t make a comeback, because it could.
In fact, we included Harvey Norman in our ‘Five Stocks to Buy’ report a few months ago. And we still think those five stocks are a good starting point for anyone who wants to set up a new stock portfolio.
The full list of the ‘Five Stocks to Buy’ is:
- Harvey Norman Holdings Ltd [ASX: HVN]
- JB Hi-Fi Ltd [ASX: JBH]
- Myer Holdings Ltd [ASX: MYR]
- Qantas Airways Ltd [ASX: QAN]
- Toll Holdings Ltd [ASX: TOL]
So, how are those stocks doing since we ‘tipped’ them on 20 June? They’re doing OK. They’re big beaten-down blue-chip stocks, so we didn’t expect fireworks.
But since 20 June (taking into account dividends) Harvey Norman is down 2.1%, JB Hi-Fi is up 19.7%, Myer is up 27.8%, Qantas is up 15.1%, and Toll is up 8.5%.
That’s an average gain of 13.8%…almost twice the gain of the ASX/S&P 200′s gain of 7.4% since 20 June.
The point is these were some of the Aussie market’s most beaten down stocks. Quite frankly these stocks are still beaten down, and would still make a good starting point for people building a new share portfolio.
And that brings me to the single most important key to investing…
Why You Should Buy ‘Good’ Stocks
Not ‘Any’ Stocks
Not ‘Any’ Stocks
That is, buying good stocks when most other folks think they’re bad stocks.
Notice we say ‘good’ stocks. We don’t say any stocks. That’s an important point because there are plenty of bad stocks lingering at the bottom of the ASX.
And sometimes it’s hard to know which stocks are good and which are bad. But if you put in enough research, analysis and due diligence, it can improve your odds.
You won’t get every stock pick right every the time – that’s impossible – but doing some research helps.
Then there’s the issue of the returns you’re after. Some bottom-dwelling stocks may only give you a 10-20% return. Other bottom-dwellers may give you a triple-digit gain.
The difference in returns comes down to the risk you’re prepared to take.
If you want big triple-digit gains then you’ll look for the small-cap stocks with the biggest potential gain. Those are the stocks we mostly look for.
But as we mentioned above, the ’5 Stocks to Buy’ are all beaten down blue-chip stocks. They’re established businesses with good cash flows, and some of them remained profitable despite the falling stock price.
That was the theme of the stocks we looked at in the latest issue of Australian Small-Cap Investigator…
Two More Great Stocks to Buy
We looked at a bunch of stocks you could call small-cap blue-chips. We came up with 21 in total…any of those are worthy of a punt.
But there were two particular stocks that we figured have the best risk/reward profile. That is they’re stocks that really could go bust if they can’t turnaround the business…on the flipside we’re looking at gains of 230% and 294% if management can bring these firms back from the brink.
You may think we’re crazy for backing these two stocks if you knew what they are. And we’ll admit they don’t fit the usual mould of our small-cap stock tips. As we wrote in the November issue:
‘…it would be hard to call either company innovative or entrepreneurial.‘In fat, I’ll admit that both of these firms are the exact opposite of what I usually look for in a speculative small-cap stock.’
In short, take notice of Gerry Harvey. He’s been in the retail business for 50 years, so he’s got a pretty good idea about how the industry works.
So when Mr Harvey says the retail sector is on the brink, we’re prepared to believe it. But we know something else too. While some retail businesses will fail, most won’t. The High Street and shopping malls will still exist.
What you need to figure out as an investor in retail stocks is which companies will survive. Those are the ones to invest in.
If it’s a Big Reward then Take the Risk
That’s the same approach we’ve taken with our latest issue of Australian Small-Cap Investigator. The industry that the two stock tips are involved in is also on the ropes. But we’re making a bet that the companies’ management is smart enough to turn their businesses around and return to profitability.
It’s a pretty big risk, but because of the potential reward, it’s worth it.
Four of the five stocks in the ’5 Stocks to Buy’ list have made good gains after most investors mistakenly thought the companies were in bad shape. We believe most investors have made the same mistake with the two stocks we’ve just tipped.
Cheers,
Kris
From the Port Phillip Publishing Library
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Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks
