Market Report: Rough ride endured by rattled retailers

Retailers had a tough time on the markets yesterday, with analysts sticking the knife in and investors dumping stock as the FTSE ended its month-long climb.

High-street mainstay and catalogue retailer Next had a torrid time after scribblers at Morgan Stanley downgraded it to underweight from neutral. Geoff Ruddell at the bank thinks the retailer’s boom years may be coming to an end. He reckons its success has been down to superior management, and warned: “Investors need only look at H&M’s recent history for proof that great execution is not a sustainable competitive advantage and that margin expansion can go too far.”

Mr Ruddell advised investors to switch to Marks & Spencer, which they promptly did. Next lost 111p to 4,580p, while M&S put on 2.9p to 475p.

Bike specialist Halfords also ran into trouble. After announcing this week a 35 per cent cut in its final dividend to help fund a recovery, investors couldn’t ditch the firm’s stock fast enough. Halfords deflated 33.3p to 300p.

Even luxury group Burberry struggled yesterday, despite chief executive Angela Ahrendts signalling the fashion house was looking to move into the Middle Eastern market. Burberry shed 4p to 1518p.

John Stevenson at Peel Hunt was optimistic about Aim-listed ASOS, upgrading it to a buy and saying the online retailer is on track for an “outstanding” third quarter. ASOS lost 79p to 3811p.

The top-flight index continued its slide yesterday – closing down 42.45 points at 6,654.34, to mark the end of a four-week run of gains – despite reassurances from the Bank of Japan and St. Louis Fed Chairman James Bullard that stimulus would continue. Lee Mumford at SpreadEx thinks traders are using comments earlier in the week from US Federal Reserve chairman Ben Bernanke, hinting that the bank may halt economic stimulus, as “as an excuse to take profits and close positions ahead of the weekend.”

HSBC fell on fears among traders that the bank’s $1.9bn (£1.25bn) settlement with US authorities over money-laundering charges may have stalled. HSBC dropped 15.8p to 726p.

Royal Bank of Scotland (RBS) also dragged the market down. Ian Gordon at Investec rated the stock a sell, saying he expects the bank to miss its 3 per cent growth target for 2013 “core” net lending. He also advised the Government to ditch the stock, saying it’s “missing another great opportunity to cut its losses.” RBS dropped 10.2p to 327p.

One of the few risers was engineering firm Smiths Group, which shot to the top of the index after delivering an upbeat trading statement. Smiths Group added 20p to 1355p.

Karl Burns at Panmure gave struggling travel operator Thomas Cook a welcome boost, upgrading the stock to buy from hold. Mr Burns says that while the company’s turnaround is still in its infancy, “the confidence displayed by management leads us to believe trading is recovering, whilst there remains significantly more cost to be removed from the business.” Thomas Cook added 0.8p to 149.5p.

Housebuilders were in focus yesterday after scribblers at Liberum called time on the rally in the sector. Charlie Campbell at the broker says that while the Government’s Help to Buy scheme is likely to provide a significant boost this year, any benefit has already been priced in and there are unlikely to be any risers.

Is a merger between drinks firms Britvic and AG Barr still on the cards? Fruit Shoot-maker Britvic outlined a cost-cutting plan not predicated on a merger with Barr earlier this week, casting doubts over the already shaky tie-up. But yesterday there was speculation that the makers of Robinsons orange squash and Irn Bru could resuscitate a deal that was effectively poleaxed when the Competition Commission launched an inquiry earlier this year. Britvic was up 10.5p at 519p while AG Barr lost 0.5p to 570p.

Aim-listed oil and gas miner Petroceltic lost ground after admitting it had to abandon one of its offshore drills in Bulgaria. The Dublin-based company lost 0.25p to 6.45p.

Cloud computing company Outsourcery made a promising debut on Aim with shares rising 16.5p to 126.5p on its first day of trading.

Buy

Electrocomponents

Stock up on Electrocomponents advises Cantor Fitzgerald analyst Caroline de La Soujeole. She said the British-based distributor of electronics and maintenance products has “a track record of outperforming its end markets, gaining market share and benefiting from its strategic initiatives”. Ms De La Soujeole is confident the firm will continue to do well and gave a target price of 300p, with shares currently trading in the region of 263.5p.

Sell

Paypoint

Ditch payment systems firm PayPoint, said Numis. David McCann at the broker thinks the shares are overvalued, reasoning that “none of the acquisitions/investments made since 2007 have yet provided a reasonable return on capital, or looks close to getting there, in our view”. Mr McCann pegged his target price at 695p for shares currently about 907.5p.

Hold

AVEVA

Cambridge-based software firm AVEVA is a keeper according to Panmure. In a note entitled “Up all night to get happy”, the broker’s George O’Connor said that while the firm’s new design technology looks “very attractive... the price idea seems out of line with current industry thinking” and reckons customers will be slow to switch to new products. He raised his target price to 2,091p for shares currently hovering around 2,390p.