Retailers Are Value Traps

Brick-and-mortar retailers have been struggling for the past few quarters, primarily because of the rise of online retailers. Retailers like J.C. Penney (JCP), Macy’s (M), Kohl’s (KSS), and Sears (SHLD) are all trading at conservative earnings or sales multiple.

However, in my opinion, most of these retailers are value traps, and investors should avoid being tempted by their undervaluation.
Buying these stocks now would likely lead to losses in the long-run, which is why I think investors should avoid brick-and-mortar retailers in the current weak sales environment.

What is a value trap?

A value trap is a stock that appears cheap, mostly because of a steep drop in shares, but is actually still expensive relative to intrinsic value. Value stock often deceives investors as a bargain, and it could be fairly difficult for investors to distinguish between them.

However, as for brick-and-mortar retailers, there are several signs that point towards the fact that all the aforementioned stocks are potential value traps. As a result, I think investors should sell and stay away from these stocks for the time being.

The first reason why I think retailers are value traps in the overall decline in the industry. Retailers are serving a market that no longer exists like it used to due to the rise of online retailers like Amazon (AMZN). No matter how good a company is, it will be difficult to survive in a sector which is in a long-term secular decline.

Going forward, I can see online retailers becoming more dominant, which is why I think investors should avoid the stocks mentioned above.

Don’t be tempted by the valuation

Low earnings multiple, or in the case of loss-making companies like J.C. Penney, low sales multiple, may be tempting for long-term investors. However, it is important to remember that companies in sectors that are in a secular decline often have cheap values. This is because the illusion of the low P/E or P/S ratio vanishes over time with falling earnings and/or sales.

Given that the overall retail sales environment has been weak over the last few months, I would strongly suggest investors to stay away from these stocks for the time being.

Conclusion

All things considered, I think investors should avoid brick-and-mortar retailers as these stocks are likely value traps. J.C. Penney, Kohl’s, and Sears in particular are extremely risky investments due to their high debt.  Macy’s, on the other hand, can turn out to be a rewarding investment if the company manages to monetize its real estate assets.

However, given the overall risk-reward ratio, I think investors should sell these four stocks.
Published on Jun 22, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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