In a recent edition of QV UPDATE (QV Investors Inc., March 24, 2017) writer Ryan Watson quotes an excerpt from the 1993 book Beating the Street, authored by Peter Lynch. In that book, Lynch relates that when looking for retail stocks he adopts a simple down-home strategy:
He drives to the local mall with his family, gives some pocket money to his children and watches where they spend it and what they spend it on. Says Lynch: ‘If you like the store, chances are you’ll love the stock.’ Eminently sensible? Absolutely.
Times have changed
But times have changed. As Watson notes, nowhere in Lynch’s book are terms like ‘mobile app’, ‘online’, or ‘Apple Pay’ mentioned. The digital revolution has transformed the retail landscape and, along with that, the criteria we have available to judge the value of a retail stock.
As you might expect, E-commerce is expected to outpace traditional retail – possibly by about 13% per year through 2020 – and is likely to represent 10% of total retail sales. We’ve all heard about iconic Sears Holding Corp. and their gloomy recent revelation: ‘historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern’. As goes Sears, so goes – potentially – much of what remains of the traditional retail world.
Behavioural investing and recency bias
Watson makes another telling observation: ‘One of the obstacles in the analysis of consumer companies…is overcoming our biases. The propensity to emphasize recent experiences in decisions about the future is referred to as recency bias. It can make investors overly negative (or positive) towards a business, and this sentiment often gets reflected in the business’ share price’.
At The Wooding Group we are informed analysts of behavioural investing – of which recency bias is but one of several notable examples – and we plan to re-visit the subject in future blogs. For now, we continue to be exceptionally vigilant in the way we track changes in consumer technology and tastes.
Canadian Tire and Cineplex stay current
As Watson mentions elsewhere in QV UPDATE, Canadian Tire may be a near century old retailer, but that has not prevented the company from becoming a national leader of household products offered through in-store, online and mobile. They are working on their home delivery capability, a vulnerability they plan to overcome.
Consider also Cineplex. While it may still be a movie theatre network: ‘The company has broadened the use of its theatres in becoming North America’s largest electronic sports and gaming stage. Furthermore, with The Rec Room entertainment lounges and its digital ecosystem project that engages customers in shopping centres, Cineplex is providing the services and experiences that millennials prioritize.’
It’s all about staying relevant. Good companies adapt to changing environments. They instill within their corporate ranks a culture of future readiness, which enables their management to embrace and exploit (rather than resist) change. As Lynch observed back in 1993: ‘Great companies in cold, non-growth industries are consistent winners’.
And that’s what we, at The Wooding Group, consistently look out for.
The Wooding Group at CIBC Wood Gundy, 780 498-5047