Today I thought I would briefly cover what may be a contrarian value opportunity or may be I'm off my trolley and it is a value trap? Any way I'll present a few bull and bear bullet points and let you decide for yourself.

Bull Points

• Cheapish looking rating of around 10 to 11x with a 4 to 5% yield based on current forecast & 2 times dividend cover policy.
• Priced at around 0.7x book value which includes lots of freehold property.
• Cutting costs by £500m over three years and have reduced capital expenditure.
• Bid for Argos cleared and have increased synergy target to £160m per annum over three years, could be upgrades once this completes.
• Brings more household goods exposure and adds to their financial services business plus furthers on line / click & collect ambitions.
• Food price inflation may turn positive after Sterling devaluation
• Qatar Holdings still hold 25% having bid for it in the past.

Bear Point

• On going price war and  with and threat from discounters expansion.
• Changing shopping habits and potential for Amazon to disrupt the market further in the medium term.
• Argos bid may be a distraction or not deliver the expected returns.
• Debt quite high and there is also a sizeable Pension deficit.
• There have been and may be more dividend cuts given the 2x cover policy.
• Food price inflation may stay negative despite higher costs from weaker sterling leading to a further margin squeeze.
• Qatar could place their stake

 
Any way as ever you pay your money and take your choice. As I have had no Food retail exposure to speak of since selling out of JS and Tesco before all the recent turmoil I have decided to take a small stake in this one as it seems to offer value and has managed the decline quite well. I'm sure I may live to regret that as it is going  against my own Scoring system although I note it does Score 93 on the Stockopedia Stock Ranks.

The final prompt for me to get involved again was that this should be a relatively defensive sector if we are heading for a recession, although they have just gone more heavily into general retail with the Argos acquisition. Plus I like the look of the long term chart and possible support in the low 200's (see chart at the end).

So there you go, as ever time will tell and you pay your money and take your choice or not as the case may be.

One of my readers was bemoaning the fact that they couldn't find any bargain in the market despite the recent set back. So I did a bit of digging around and found some cheap looking small retailers that I have come across, although I stress I am just pointing them out - not recommending them - so you should do your own research if they interest you.

Now this is topical because after a soggy August in the UK the BRC are suggesting that retail sales slowed to crawl as a result with clothing retailers expected to be hit the most. However the report from Reuters does suggest this may have been a blip due to the late August Bank holiday which meant that back to school spend and summer furniture sales were not included.

Any way with that background I thought I would start by highlighting a furniture retailer which came back to the market earlier this year having gone bust previously. If that doesn't immediately put you off the stock concerned is SCS. Now they rather blotted their copy book or stained their sofa as it were when they warned about a General Election slowdown just after they floated. This caused the shares to fall below the issue price and as you can see in the chart below to be offered at up to 40% off their recent highs like one of their regular sales in store.

While you can't buy the shares on interest free credit, the interesting thing is that is seems to have been building a base around the 140p level and since then they have updated on trading over the remainder of the current year to the end of July. In this they confirmed that they trading in line with the down graded forecasts and were committed to paying out a big dividend. Thus if forecasts of a full year dividend of 14 pence are correct, this suggests they should pay a final dividend of 11.2 pence as they paid an interim of 2.8 pence back in May. Thus at a price of around 160p they would be yielding 7% on the final alone and a whopping soar away 8.9% if they maintain the dividend next year too. If they manage to hit next years earnings forecasts too then it may be on less than 12x, but obviously no guarantees with this one.

So obviously not a quality play and they earn pretty thin margins and slipped up just after floating, but could be an interesting high risk play on a pick up in consumer spending on the back of increasing real earnings and falling petrol and heating costs. I also note the gap on the chart at just under 220p which often get filled so this could be a medium term target perhaps if they can get back on track. There was also a good write up by Edmund Shing here on Stockopedia earlier in the year if you want to read more about it.

Now if that is not down market enough for you then you could always slip down the high street and treat yourself to some cheap shoes from Shoe Zone (SHOE). This is another cheap retailer that came to the market not that long ago and has also had a profits warning and price collapse more recently. In their case rather than blaming the election they trotted out ye olde weather excuse and apparently the wrong type of ladies boots (ankle) being favoured, although with less imitation leather I thought they would have been higher margin than knee boots?

So on the chart it is a similar picture to SCS with a gap this time at just under 260p versus the current 170p or so price. At this price it trades on maybe just under 10x with a forecast yield of 5.5% or so. I say maybe because it is an October year end and we have just had a poor August, weather wise in the UK, so I guess they could be vulnerable to another profits warning perhaps on the back of that as they blamed the weather for the last one. So on that basis as I'm not that keen on their stores or their shoes I'm not sure I can get that excited about the share either, despite the apparent value. But again their was a more bullish write up on this one on Stockopedia recently if you wanted to get more detail on it.

Finally if Sofa's and shoes are not your cup of tea then everyone's got to eat and drink right? So despite this the food retailers have been going through the wringer in recent years as competition from the German discounters Aldi and Lidl has "Mullered" them. Thus the only part of the sector which has been growing has been their high street or convenience type shops which, apart from Morrisons who were too late to the party, have been a reasonable success for the majors.

Now the main casualties of this dual pronged expansion of smaller store by the Germans and the major UK food retailers has probably been your typical high street / corner shop / convenience store which doesn't have the range or the buying power to compete. However there is one chain of these that has been expanding by buying up failing community Newsagent shops (CTN's). This one is McColls (MCLS), another recently listed retail group with a share price chart that has, perhaps unsurprisingly, been heading in the wrong direction too.

So there is a bit of a pattern emerging here, recent new issues not having done so well, which is one reason why I don't generally participate in new issues unless they are being priced to go. This is because they are usually coming to the market because the owner / managers think it is a good time to sell. This one has therefore, without a profits warning as far as I can tell, drifted down to about 10x with a 6.5% yield which may be about right / fairly full for the limited growth that is now being forecast.

Of the three I can just about see the case for this one where they are buying up small failing stores and improving them by rebranding and offering more in the way of groceries and alcohol. They also seem to be favouring neighbourhood or community stores as far as I can tell which I guess benefit from the localised monopoly and laziness or inability of their clientele to go to a supermarket perhaps 5 minutes down the road maybe? Again if you want to read about it in more detail there was a good article in the Midas column in the Daily Mail recently.

*Beware they may be cheap for a reason and because of that I cannot recommend a purchase, but as I always say you pay your money and take your choice. Talking of which on a related matter see this classic video below and read all about it if you are too young to know the story or are not familiar with it.