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Cape Town - The easy profits from investing in clothing retailers' shares have possibly already been made and investors must consider which of these shares should perhaps now be sold.
The sale by Mike Lewis - a Foschini non-executive director - of about R75m worth of his company's shares at the end of September attracted attention.
This occurred after the Lewis family had made large investments in the company last August, and investors might wonder if it's time to dispose of their holdings in the clothing retail industry.
According to Alwyn van der Merwe, director of investments at Sanlam Private Investments, last year cyclical shares were largely priced for bad news and therefore very cheap. Foschini's price:earnings ratio at that time was 7, considerably lower than the current 11.
"Then the shares were good value for money. Lewis did what any value investor would do. He knew that the company's fundamentals were sound and that in time he would profit from the shares he was buying."
Unlike in 2008, clothing retailers are currently reckoned to be fair value and no longer cheap, says Van der Merwe.
Abdul Davids, head of research at Kagiso Asset Management, says his company regards clothing dealers like Foschini and Truworths as being too expensive at the current share prices.
"It's mainly because of the companies' high levels of earnings. Foschini and Truworths are among the best-performing shares for this year, with growth rates of 33% and 30% respectively. But I think now is a good time to sell Foschini shares, because there is every chance that the shares' earnings over the next two years could disappoint the market."
According to Davids, Foschini and Truworths have enjoyed strong earnings growth in recent years, largely owing to a very liberal credit policy.
"Both companies currently have very large debtor balances on their books. The conclusion in respect of both Foschini and Truworths is therefore that, despite the apparently low price:earnings ratios of about 11 for Foschini and 12.6 for Truworths, there is the possibility that their earnings could be under pressure over the next two years."
- Sake24.com
For more business news in Afrikaans, go to Sake24.com.