Bargain basement or liquidation sale?

This is Flash's latest blog over at paddypowertrader:

One of the equity sectors I’ve spent time trading profitably in and out of over the last few months is UK retail. UK retail, I hear you ask. Are you insane? Perhaps, but I’ve made a few bob on some long positions in big, unloved retailers over the last few months. Not by my usual ‘buy and hold’ strategy but by buying on dips and looking for peaks to sell.

Take DIY retailer Kingfisher, for instance. Since mid-June it’s been trading in a 96p – 140p range. By buying near the bottom of that range and selling when it gets up to the high 120s or 130s I’ve picked up £30 here, £40 there. Not too bad. Kingfisher is one of those unloved businesses that is likely to do well in a buoyant housing market and in a ‘Changing Rooms’ era when home improvement, paid for by borrowing and equity release is all the rage. Now that house prices are plummeting, just like companies that sell carpets and ‘big ticket’ furniture items like sofas, they’re not doing nearly so well, so the market has already priced in a considerable reduction in their profits.

Like half the rest of the spread betting community, I made a few bob shorting the likes of Topps Tiles, Land of Leather and DSG Group earlier this year. But Kingfisher is interesting because as well as mega-home improvement stuff, they also sell everyday stuff – tools, paint, plants, Christmas lights. The B&Q brand is solid and they’ve been offering some good deals recently to lure the punters in. And their shares have consistently bounced when they get down towards the bottom of the 96p range. So having sold my last lot of Kingfisher at about 110p, I bought some more this morning at 102p.

Another lot I’ve been watching are the supermarkets. When Morrisons got down towards their recent low of 225p I dived in and bought at £3 a point from 229p. In spite of all the carnage in the wider indices they’re still trading at around the 250p mark. Sainsbury’s is the same. Bought in mid-October about 250p, sitting at 270 to 280p. Now these aren’t big gains but so long as the price holds off the yearly lows there’s some money to be made. And if we do eventually see a bounce (which I have to say, I’m beginning to give up hope on), these are great levels to have got in at and bought some shares. And I’ve protected all these positions with stops so I can’t lose any money.

Retail stocks are a gamble at the best of times. There are so many factors that affect their price – fads and fashions, stocking levels, profit margins, whether they have the right buying policy (look at the mess that M&S made of food retail earlier this year); but there are also residual values, and there are dividends to be had. Retailers also have assets. And Marks and Spencer, according to some analysts, is trading at around the residual value of its property portfolio. Now if they can make some money by aggressively discounting (and judging by the number of M&S bags I saw on the train home this afternoon, they must be doing something right) to be buying into a massive blue chip global consumer brand at this level does begin to look like a bargain basement price.

And I’m watching Game Group (I’ll do another blog about why video games are worth keeping an eye on), Debenhams, and even that very unloved, almost unprofitable outfit French Connection. Mrs Rabbit says that their coats this season are exactly the right shape. In the US, I’m watching Wal*Mart and cheapo retailer Family Dollar.

Now, this is seriously contrarian. We know that the consumer is being hit hard by the downturn; unemployment is rising; disposable income contracting. But in a world in which commodity and energy prices could easily plummet another 25%, and in which ‘just in time’ delivery means that retailers don’t have to carry the same amount of stock that they used to, which means that overheads are rapidly falling, it would be a very poor retailer indeed who couldn’t still make some money in this period. And today’s retail sales figures, whilst a bit unbelievable (only a 0.1% decline in Oct?) might just suggest that there is more resilience in the high street than the consensus suggests.

So with a slightly churning feeling in the pit of my stomach, I went long of M&S today from 205p, and I’m considering buying a few hundred M&S shares for my ISA.

I have to say that it makes me feel anxious writing this, but if I was Warren Buffett (or even Philip Green) I’d be out with my cheque book buying up sackloads of high street brands in anticipation of better times in two or three years time. As it is, I’m just trickling in a few long positions (£1 here, £2 there) and seeing what happens. I’m not ready to bet anything on a rise in the wider indices though.

In wider trading, I’ve cut back. I’m still running a short EUR/GBP position, a short GBP/USD position, and that long gold trade from $129. I’ll keep you all posted about how I get on.