by Kayleigh Kulp
Because of such low prices of some retail stocks, investors should be weary of “value traps,” said Daniel Lugasi, portfolio manager at VL Capital Management. “We believe the most insulated retail companies are those that offer a differentiated service than a company such as Amazon, can provide,” he noted, pointing to TJ Maxx /HomeGoods and Ross as prime examples of “differentiated” shopping experiences because they offer discounted products curated for shoppers. TJ Maxx trades at a P/E of 19x because it is a well-run retailer, Lugasi noted, adding that “value traps, such as Macy’s, are trading at a P/E of 9x earnings, but the business is in decline” by other indicators.
“As we have seen, the traditional anchor stores at malls have come under considerable pressure over the last few years,” said VL Capital Management’s Lugasi, citing Macy’s, Sears, JCPenney, Nordstrom and Dillard’s. “Their footprints are so large, and rent typically constitutes one of their largest operating expenses,” he added. “Over time, what we have seen is this pressure spread to smaller format stores that are located within shopping malls.”