In the current stock market environment, bargains are showing up
wherever you turn. Thousands of stocks are now trading at close to
two-year lows, although many of them should be avoided since
business can get even worse in a slowingeconomy . This is why it
pays to focus on companies that are doing well right now -- because
they have the best shot of posting major gains when investors start
I've been tracking three small firms in the retail sector that have
recently delivered solid quarterly results and remain every bit as
cheap as their less successful peers. It's only a matter of time
before investors separate the wheat from the chaff and start buying
again. Here they are...
1. Casual Male (Nasdaq:
I've been tracking this retailer for about five years because it
dominates a niche of retail and had been underperforming relative
to its potential. In other words, the stock had room for
improvement. In the ensuing five years, the weak
has kept this from becoming a great investment, but management has
done a great job of improving all aspects of the retail operation,
setting the stage for real gains when spending finally turns up.
Just-released results tell the tale for this purveyor of
extra-large menswear (known as "big and tall" in the retail trade).
In the second quarter of the year, same-store sales rose roughly 5%
from a year-ago, largely due to price increases. Management now
keeps each store stocked with 15% less
than a few years ago. It's easier to put through price increases
when you manage inventory well, since there is less need to mark
down slow-selling goods. The lack of stale inventory meant
gross margins were able to expand to 48.3% in the quarter. This is
the highest expansion rate in 10 years, and well above the 42% to
44% gross margins seen in 2007 through 2009. You usually only see
such a big jump when times are good and consumers are spending
freely, so this current gross-margin gain portends well for when
the economy is stronger.
Rising sales and firming margins helped
to rise 17% in the second quarter of 2011 compared with a year ago,
and management expects full-year profits to rise by a commensurate
But the lousy stock market is a key reason why this stock has
fallen more than 30% from the
-- despite a big jump on Thursday, Aug. 18, which put the stock
back to about $4. It now trades for just five times
and nine times projected
earnings per share (
. It's important to focus on the fact that these metrics are being
generated in a brutal economic environment. Look ahead to better
days, and the stock would trade for closer to three or four times
"normalized" cash flow and five times normalizedEPS .
2. Christopher & Banks (NYSE:
This provider of women's apparel strayed from its tried-and-true
merchandising approach during the past few years and paid the price
for it. Edgy fashions failed to resonate with its fairly
conservative customer base, so sales have steadily fallen from $561
million in fiscal (March) 2008 to $448 million in fiscal 2011.
Christopher Banks routinely earned $0.75-$1.00 a share each year in
the past decade, but hasn't made a dime since fiscal 2008.
This is why it was such a surprise when the retailer delivered an
in the fiscal first-quarter results on June 30, even after analysts
had expected a loss. A revamped line of clothes got the credit and
management noted foot traffic is starting to rebuild at its stores.
shot up 14% to $6.43 the day after results were released, but the
subsequent market rout has erased those gains, pushing the stock
down to a two-year low of $4.52 and well below the $30 mark reached
back in 2006. The key question is whether the fiscal first quarter
was a fluke. Management appears to understand the importance of
sticking with what the customer wants: "We remain extremely focused
on evolving our merchandising strategy to update our assortment to
better align with our customers' tastes, which will be fully
reflected in our fall deliveries," noted
Larry Barenbaum in a press release.
Does thismean that fiscal second-quarter results, slated for
release in late September, will also be strong? It's hard to know
in this uncertain economy. What is clear is this stock can't get
any more washed out. The whole company is worth $160 million in the
market, yet the company has $100 million in net cash and $164
million in tangible
. Trading at less than six times the average profit rate of the
past 10 years, this
has a clear floor in place with perhaps 100% upside.
3. Rent-A-Center (Nasdaq:
Even healthy retailers are getting little credit right now. This
company, which rents furniture and appliances to lower-income
consumers (giving them anoption to buy), has been putting up steady
Free cash flow
has ranged from $100 million to $300 million in each of the past 10
years -- a true "rain or shine"
The top line has been less inspiring: sales peaked at $2.9 billion
in 2007 and have been slipping modestly. To restore growth,
management is pursuing a pair of initiatives. First Rent-A-Center
is moving into Canada and Mexico, with a combined 33 stores thus
far, and plans to double or triple the store count in a year or
two. Second, other retailers are starting to house Rent-A-Center
kiosks within their own stores (known as RAC Acceptance). There
were roughly 350 of these stores-within-stores at the end of last
year. This figure is on track to exceed 700 by the end of this
These expansion efforts are crimping profits since management has
to invest in inventory and marketing. As a result, 2011 profits are
likely to be flat at around $2.85 a share, before an expected 15%
jump to $3.25 in 2012. Shares trade for just 6.5 times this
projected 2012 figure. While shares remain in a funk, Rent-A-Center
is buying back stock while supporting a
that now sports a 2.6%
Action to Take -->
All three of these retailers are trading poorly even though their
underlying businesses are on the mend. This makes a perfect
combination for value investors -- bargain prices and huge upside
potential (up to 100% for one of them). When the market stabilizes,
all three look poised to make up much of the ground they've lost in
-- David Sterman
The 10 Best Stocks to Hold Forever
One of these stock has plowed through 8 bear markets and has
returned over +170,000% since 1972. Every $700 you invested back
then would be worth more than $1 million right now. Today, the
company is raising its dividends, spending billions to buy back its
own shares, making smart acquisitions, and is the dominant leader
in a $30 billion market. This is just one of the 10 best "Forever"
stocks to own today.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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