As GDP growth slows down in the UK, shareholders ofNEXT(LSE: NXT), Ted Baker(LSE: TED) andSuperGroup(LSE: SGP) may have more than one reason to worry about the value of their holdings even more so now, as it appears clear to methat these three retailers need steady annual GDP growth of 2.5%/3% to justify their lofty equity valuations.
The End Of The Road?
The British economy grew far more slowly than expected in the first quarter of 2015, official data showed Tuesday, delivering a blow to the government just nine days before a general election, Reuters reported today.
The UKs economic recovery slowed sharply, with GDP growth of just 0.3%, according to a preliminary estimate, the news agency added. The construction, production and agriculture sectors shrank, and only services showed a decent pattern of growth.
GDP growth below 1.5% a year is not acceptable: neither for the household Britains indebtedness is still highly problematic norfor companies that need lots of domestic growth to reward shareholders.
First signs of stress in the non-food retail space emerged last week whenFrench Connection warned onfull-year results its shares sank almost 30% on the day.
Tomorrow, 29 April, NEXT reports its first-quarter results.
NEXT: Solid Business, Risky Investment?
NEXT is a solid business but is not the most obvious equity investment right now.
The problem is that at 17x forward earnings itll have to grow revenue between 5% and 10% this year and next to keep up with bullish estimates for dividends and earnings growth.If the domestic economy sputters, the second half of 2015 could be painful for shareholders, whose holdings havelost 6% of value since a record high in mid-March and have risen only 6% this year (-1.4 percentage points vs the FTSE 100 year todate).
NEXT currently trades at 7,165p, which points to downside of between 5% and 10% into the second quarter.At present, its valuation is in line with the average price target from brokers, but Id be careful about my investment strategy if I held a long position in the stock because comparable 2014 figures were good, and they wont be very easy to beat.
I warned youthis year could have been challenging.
Ted Baker: Still My Favourite Pick
Ted Baker has been one of my favourite equity investments in the UK since it traded at 1,800p, and youd have recorded a +47.3% performance, excluding dividends, if you had followedmy advice10months ago.Id still buy Ted rather than NEXT, but at 25x forward earnings or more, based on conservative estimates, I do not consider it a hard bargain anymore.
So, Id reduce exposure or Id take profit if I were invested, after a +30% pre-tax performance this year. At 2,855p a share, Ted Baker now trades about 1 above consensus estimates, but it remans a much more solid investment than SuperGroup based on its profitability and cash flow profile.
SuperGroup: Still My LeastFavourite Pick
I do not fancySuperGroups fundamentals, and its stock is way too expensive based on its volatile earnings profile and several other financial metrics.A top-down approach doesnt make much difference to the investment case, either, in my view.
Based on forward earnings, the stock trades above 17x, which is a demanding valuation for a business that has to prove it would not disappoint investors in future as it did in recent quarters.I need more evidence from its new management team in order to suggest that its stock could be a bargain at 990p, where it currently trades after a 40% decline in the last 12 months or so.
If, just like me, you are looking for less cyclical investments than SuperGroup, you should learn more aboutour top picks, whose names are disclosed inthis Free Fool report!The MotleyFool team has selected companies whose stocks have rallied in recent years, but one in particular has caught my attention: itdesigns and manufactures luxury accessories, clothing and footwear, and its shares have grown at more than 60% a yearon average since 2010.
Now, this value proposition has had problems in recent times, but investing in it could be an opportunity too good to pass up, as it looks like a promising restructuring storyrather than a growth play.Our reportiscompletely free for alimited amount of time,soclick here right away and have a look!
Has The Market Missed This Hidden Companys Overhaul?
An innovative product that could double sales. A healthy net cash position. The potential to expand into the USA. These are just 3 of the catalysts that we think could catapult the share price of this small-cap company northwards.
But heres the kicker the market seems to be overlooking that this is little-known business has just emerged from a balance-sheet transformation — which is why our analysts particularly excited about the potential growth opportunity on offer here
Click here to discover how this buried company could enrich your portfolio!