June 21, 2018

Buying H&M - not Zara, because children are the future



A reader of my stock blog wrote to tell me to take a look at H&M because the stock has a high value rating. Indeed, the H&M stock has a value rank of 71. At the same time, the growth rank is 30. That is a bad rank because it means that 70% of comparable companies grow faster than H&M.

So I look at the situation of Zara, a clothing company that I view as a direct competitor. Zara is owned by Inditex, and their ranks are surprising: value: 28, growth: 62. So the exact opposite of H&M. However, this is actually completely logical because companies with slow growth are cheap to buy and those with fast growth are expensive.

Both stocks, therefore, reflect perfectly what is happening in the stock market right now: the high-flyers are celebrated, the lower altitudes are scorned. This is not very smart because the past doesn’t say a whole lot about the future.

When evaluating Zara & H&M, the stock market assumes that things stay the way they are. I very much doubt that this is a certainty. That’s why I decide to google the companies.

I immediately find something about H&M: An analyst slams the stock in a long article. The online strategy is bad, he says. In addition, H&M is focusing too much on the shops. Basically, these are two sides of the same coin. H&M has put the focus on the shops and that’s why their online presence is weak. The third thing the analyst criticizes is that they are too slow in terms of realization. "The realization of the analyst’s desired strategy", is probably what he means.

So the analyst is saying the same thing three times and that’s why he decides against buying H&M. However, this view is very short-sighted, because if he is right, then the H&M management will notice this sooner or later and will adapt its strategy. It’s not very likely that the managements of large, publicly listed companies follow unreasonable strategies for a long time.

Further internet searches revealed that customers are in disagreement about the quality of the brands. Some like Zara, others H&M. My wife is buying clothes for my boys from H&M. There will always be children, and 50% of them will be boys that need a large amount of clothes.

In other words now is a good time to invest in H&M. I happily accept the tip from my subscriber and do the same. I am buying 333 stocks from H&M and not from Zara.


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