Sept. 12 Forum Update: 'Retail Sector' Edition
- By James Li
Last week, we introduced "The Forum Update," a weekly series of articles discussing top posts from the GuruFocus Forum. In the second edition, we will discuss the retail sector, one of the most cyclical market sectors in the U.S.
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The intrinsic value of CCL
Retail sector background
Legendary investor Peter Lynch noted that luxury travel companies like Carnival Corp. (CCL) and brand-name companies like Michael Kors Holdings Ltd. (KORS) have cyclical business patterns. Such companies have high earnings near the peak of business cycles, resulting in artificially low price-earnings (P/E) ratios.
The retail sector primarily includes consumer cyclical industries, including apparel, furniture and entertainment. Another term for the consumer cyclical sector is the "consumer discretionary" sector as consumers can purchase these goods "at their discretion," i.e., consumers usually will not purchase luxury items or take top-notch cruise vacations in a recession.
Although most retail companies have high profitability during a bull market, not all retail companies have this luxury. A previous article discussed how brick-and-mortar retail stores like Dillard's Inc. (DDS), Macy's Inc. (NYSE:M), Sears Holdings Corp. (SHLD) and J.C. Penney Co. Inc. (JCP) have declining growth potential due to contracting comparable sales growth. Sears and J.C. Penney have the highest probability of financial distress based on their Altman Z-scores. Additionally, Sears and J.C. Penney have declining Z-scores, suggesting an increased bankruptcy risk.
Please keep the Forum going
We have started a thread where you can share your ideas about the retail sector. Please think about the following question and add your comments to the thread:
What do you think the future of the retail sector will be?
A look at next edition's topic
Edition 3 of "The Forum Update" will discuss the pending merger between Qualcomm Inc. (QCOM) and NXP Semiconductors NV (NXPI). Please add your comments about the merger to the thread on this topic as well.
Disclosure: I do not have positions in the stocks mentioned.
This article first appeared on GuruFocus.
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The intrinsic value of CCL
