In this week’s video insight Roger suggests a repeatable way to invest, in a sector of the Australian stock market, that appears to have provided excellent returns to those who have applied it in the past. That sector is retailers, and there are three companies that should be on your watch-list.

Transcript

Roger Montgomery:

Almost 30 years ago, in the mid-’90s, a now-retired fund manager gave me a tip for what he described as an “easy” way to make money in the Australian stock market. Given how tough even professional investors are finding the market at present, I thought I’d offer a little early Christmas cheer and share that tip with you today. 

Before you get too excited however, keep in mind this isn’t a get-rich-quick idea. I am not suggesting anything algorithmic like arbitraging futures and ETFs on the same underlying index or anything like that.

Instead, what I am about to suggest is a repeatable way to invest, in a sector of the Australian stock market, that appears to have provided excellent returns to those who have applied it in the past.

When it comes to consumer discretionary retailers, it’s easy to think ‘high risk’, especially when they’re on the nose, as they are now, thanks to rising interest rates, and higher inflation thanks to rising fuel and utilities costs. But identifying the retail concepts that are popular and will expand, is one of the simplest pieces of due diligence that can be conducted. And as you’ll see in a moment can be very lucrative. 

My preference is for the company to expand through organic sales growth and store growth. As you will see, store growth ambitions are usually disclosed in the IPO prospectus and within twelve months you commonly have a good idea about management’s ability to deliver and the customer’s affection for the concept. 

Take a look at Lovisa (ASX:LOV). Ten years ago, in 2012, Lovisa sold its product through 60 stores. At its IPO in 2014, it had grown to 220 stores in just two years. And today, just eight years after listing, Lovisa distributes its jewellery through 449 stores. Now look at the share price performance… since it listed, the share price is 976 per cent higher. That’s a compounded return of almost 35 per cent per annum. And by the way, that’s after the rout in markets investors in companies other than Lovisa have recently experienced.

Next let’s take a look at JB Hi-Fi (ASX:JBH). It’s a retail store concept everyone knows. The brightly coloured window and in-store signage shouts ‘bargain’ and shoppers have supported the concept for more than two decades as the offer shifted from vinyl records to CDs to DVDs and then to a broad range of electrical goods. JB Hi-Fi IPO’ed in October 2003, with just 25 stores, issuing shares at $1.55. On the first day of trading the shares closed 45 per cent higher at $2.25. Today, with 316 stores (including acquisitions of Clive Anthonys and The Good Guys) the shares trade at $43, a return of 2,692 per cent, or 45 per cent per annum, excluding dividends.

Finally, Nick Scali (ASX:NCK). The furniture retailer founded by the father of current CEO Anthony Scali, IPO’ed almost nine years ago, in May of 2004. At the time of its 2004 full-year results, it reported sales of $43.4 million and earnings of $6.7 million from just 10 stores. The IPO price was $1.00. With 85 Nick Scali stores today and more than 90 Plush stores, the share price is up 940 per cent at $9.40. And at the peak of the market boom last year, with the shares at $16, the share price return was 1,600 per cent or something approximating 37 per cent per annum.

Markets and share prices wax and wane on the back of a multitude of influences that often have little to do with the underlying businesses they represent. I trust you’ll agree it is indeed much easier to stomach those sometimes spine-tingling swings when you’re on a winning retail concept rolling out stores at a great rate of knots.

The Montgomery Small Companies Fund owns shares in Lovisa. This video was prepared 23 November 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Lovisa you should seek financial advice.