Generally speaking, I see myself as a value investor. Why then, would I so often look towards retailers and generally consumer facing businesses for my best investment ideas (see: A Retail Reversal and Irrational Retail Valuations)? After all, many of the best retail stocks are those that rely on growth to provide shareholder return. And, in the case of liquidation, the bulk of their assets are held in inventory and property* that are rarely liquidated at full value. Then again, Warren Buffett, a value investor if there is any, has made serious bets on consumer product and retail businesses like Coca-Cola Co. (NYSE:KO), CarMax, Inc. (NYSE:KMX), Wal-Mart Stores Inc. (NYSE:WMT), and Costco Wholesale Corp. (NASDAQ GS:COST).
* To be completely fair, significant value in property can often be unlocked to stave off bankruptcies or generate tremendous shareholder return through sale-leasebacks which generate plenty of cash or potentially attracting buy out firms interested in getting a piece of the real estate.
Warren Buffett’s consumer products and retail business picks are typically mature businesses with a proven cash flow. But, a look at the top ten returning stocks over the ten years leading up to the peak of the markets in 2007 finds that 30% would have been significant retail or consumer facing businesses - Chico's FAS Inc. (NYSE:CHS), Apple (NASDAQ GS:AAPL), American Eagle Outfitters Ne. (NYSE:AEO). Arguably 40% with DISH Network Corp. (NASDAQ GS:DISH). The only other industry or sector with similar representation in this list was oil and energy stocks and this was due to the commodity price bubble more than any thing else. Admittedly, retail stocks take a beating in recessions, but CNN Money’s recent article highlighting stocks which have bucked the trend in the decade ending in 2009, is similarly heavy on retailers Apple, AstraZeneca PLC. (NYSE:AZN), and Carter's, Inc. (NYSE:CRI).
The appeal of retailers is that they are simple, easy to understand businesses. Investing in such businesses, however, requires more nuance than just solid financial analysis. Value for these businesses can be transient ebbinging and flowing with consumer tastes and management execution which ultimately drives demand.
