The recovery of retail share prices?
It's been big.
I can't say I hadn't noticed – disclosure alert: I own some of the companies I'm about to talk about.
But I hadn't noticed just how big the recovery has been.
The Motley Fool's Director of Research, Kevin Gandiya, shared some numbers with the team yesterday.
As of that date, these were the one-month share price gains of four online retailers:
– Cettire Ltd (ASX: CTT) up 156%
– Adore Beauty Ltd (ASX: ABY) up 93%
– Temple & Webster Group Ltd (ASX: TPW) up 64%
– Kogan.com Ltd (ASX: KGN) up 44%
(I own Adore and Kogan shares, for the record.)
Those are some serious one-month numbers.
And remarkable that they're four similar companies.
But they're not oil explorers. Or biotech hopefuls. Or – god forbid – crypto funds.
They're retailers.
Online retailers, to be sure, but retailers.
Not the sort of businesses that can turn on a dime. Or are particularly easy to grow.
Software companies can sell to customers, who download infinite copies of inventory-less products, instantly.
Biotechs can make a discovery, get an approval, or sign a distribution deal that can dramatically change a company's future with a single signature.
Retailers?
Even online ones need to attract customers, make a sale in a hyper-competitive environment, then fulfill the order with physical inventory that's been made, stored and then shipped.
Not the easiest businesses to scale.
So, what gives, to see share prices soar so significantly in such a short amount of time?
In short, sentiment.
The market – writ large – has simply changed its collective mind.
A month ago, the market hated these companies.
In the 20-odd trading days since… it hates them a lot less.
Don't get me wrong – they're all lower than past highs.
There are no victory laps here.
But the phenomenon is too notable to pass up.
Yes, some sales numbers have been better than expected.
That helps.
But that only helps if the 'expectations' were wrong in the first place which — I don't think it's controversial to say – they clearly were.
Otherwise?
The market just changed its mind.
In a very big way.
But I've got to ask you: is it really possible that a retailer – even one relatively early in its corporate life, like Cettire – can be worth one price a month ago, and 2.5 times that price, this week?
Note I didn't ask about its price.
I asked about its 'worth'.
And the difference between those two terms is precisely the point I want to make.
See, it's my contention that some of the current retail valuations are way too low.
It's a point I've made almost everywhere in the past few months – TV, radio, online and here.
Here's why:
It seems to me that the market has decided that, because the economy might slow (maybe even dramatically) many – most – retail stocks are worth nearly nothing.
(Okay, not 'nothing', but some are trading at or near single-digit price/earnings ratios!)
Now, let's play this forward.
Let's say – touch wood – we go into recession in 2023, and sales and profits fall.
Not great.
But let's say you have a 5, 7 or 10 year time horizon.
As long as these businesses aren't significantly or permanently damaged by a recession, they'll come out the other side.
They'll probably go on to deliver even higher sales and profits in the years ahead.
Sure, the 'recession' year is a net detractor.
But if you could buy an asset that might struggle for a short time, then go back to its successful past… well, a share price that suggests relative Armageddon is likely to be, in hindsight, cheap.
And that downturn may not even come, or be shorter or shallower than some expect.
Put more simply, investing is a game of probabilities. There is a range of possible outcomes.
Right now, most retail companies' shares are priced as if the most likely outcome is a permanent (or very-long-term) loss of value.
Which means that if the future is brighter, the shares are available at pretty attractive prices.
And moreso, if you were to consider this group (and more besides) as a basket.
One or two might struggle for one reason or another.
But as a group?
Now, that doesn't mean I know what's going to happen next.
They might fall again before they rise.
I might even – how many people say this out loud? – be dead wrong.
But I think there's a very, very good chance that companies priced for Armageddon will do well from here, if such disaster doesn't, well, actually happen.
And unless the Australian economy falls into a permanent funk, I reckon that's a pretty good bet.
Fool on!
