Upgrades of general retailers are likely following some better than anticipated Christmas updates, but analysts are advising investors to pick stocks carefully.
The encouraging numbers are likely to lift sentiment towards retailers, many of whose shares soared last year, but the sector remains vulnerable to economic uncertainty.
Analysts at Oriel forecast that 2010 will be “the year of the stock picker” and noted: “We think Christmas trading statements will reveal the last of the low-hanging fruit, where sizeable upgrades may not have been fully factored into analysts’ forecasts.”
KBC Peel Hunt analyst John Stevenson said: “To a certain extent we believe [Next’s] update represents a reasonable proxy for the sector performance, with upgrades of 5% to 10% likely for a number of retailers.
“However, for the year ahead there are relatively few retailers we expect to continue to deliver strong profit and cash generation.”
But Ambrian analyst Philip Dorgan said comment made by Next about a “more stable” consumer environment in the second half of last year “augurs well for Christmas trading updates”.
He added: “For the sector as a whole, we believe there is a considerable margin recovery opportunity which has not yet been discounted. True, the next six months may be tougher than the last, but share prices will increasingly look beyond this.”
Oriel identified DSGi, Topps Tiles and Home Retail as among potential upgrades, and said Kingfisher offers good value. JD Sports Fashion and HMV were said to be vulnerable to downgrade - the former for “declining to provide the market with hard numbers” in last month’s interim management statement and the latter on like-for-like sales prospects.
Broker Shore Capital’s preferred buys are Home Retail and Next, “for their superior cash generation and multichannel approach” and Debenhams “for a structurally improving gross margin story”. It said Halfords and WHSmith have defensive merits while Burberry is well placed “to play a global economic recovery”.
Credit Suisse analyst Tony Shiret is keen on Next, Kingfisher and WHSmith, all of which, he said, share characteristics including good balance sheets and earnings momentum. He was bearish on Home Retail, which he feared faced structural and pricing pressures.