MARKETS SPECTATOR: Spring into fashion

Retail stocks that have been bumping along the bottom for the last two years are finally showing signs of life.

Continuing on from our retailing theme yesterday, we note Specialty Fashion Group has been upgraded by Credit Suisse.

Despite declining to provide guidance ahead of the all-important Christmas trading period, the group provided a positive update at its recent AGM.

"Commentary suggested a return to sales growth in the half and the delivery of expected benefits to gross margin. Warmer spring weather has provided a better environment for trading in 2012, but consumer sentiment remains cautious and this will be particularly so within broad sections of Specialty Fashion Group’s core customer base”, Credit Suisse noted.

"The retailer closed 27 underperforming stores in FY12 and is likely to continue the rationalisation of marginal stores in FY13. Change to the store portfolio is expected to lead to a portfolio of better positioned stores, improve profit margin, reduce volatility in trading and increase return on capital”.

Subsequently, the broker upgraded the stock to neutral from underperform, with its target price lifted to 65 cents.

image

Source – Iress

The above chart paints an increasingly positive picture for the retailer. Everyone knows retailers have had a rough time of it over recent years. The fact that the stock has tracked sideways over the last year, forming a basing pattern rather than actually continuing to make new lows is positive. It confirms that a lot of the bad news is already priced into the market.

Encouragingly, we can see that the stock has started to attract some bargain buying as it is now testing the resistance area around the 60 cent level, as marked on the chart. A move through here would confirm a breakout from the basing phase and would offer a very low risk entry point into a cyclically depressed sector.

A stock we mentioned yesterday, Harvey Norman is also displaying very interesting price action.

image
Source – Bourse

The big chart above shows weekly price action over the last two years, where we can see that the stock has been tracking sideways for at least a year. The blue line represents a major support level that if breached decisively would be very bearish indeed. However, on the inset chart the yellow circle marks a big rejection of lower prices on very strong volume, the third time over the last 12 months that the stock has found significant support around the $1.78 level.

This is an encouraging sign, especially if you consider the broker upgrades a few days ago too. It’s by no means a certainty but positive price action from here would offer a very low risk entry into the retail game too.

Related Articles