A Stock I Recommended on June 8 is up 52%. These 3 Could Follow

By David Sterman,

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I've heard an oft-repeated sentiment from colleagues throughout my two decade investment career: "If it's not timely, it's not worth my time." I love that. While many of these folks are buying and selling stocks they think will make an imminent move, they are ignoring the vast universe of stocks that lack short-term catalysts. For those with an investment view that extends beyond a quarter or two, some sectors are practically begging to be noticed. Case in point: consumer electronics retailers. These stocks are cheap, unloved and poised for better days ahead.

Perhaps the sector is already springing to life. Just three weeks ago, I recommended shares of Conn's (Nasdaq: CONN ) a Texas-based regional consumer electronics chain. The stock has made a 50% move in that short period, and I think more gains lie ahead. In fact, the stock would need to rise another 40% just to account for the value of its inventory and accounts receivable . Recently trading at $8.70, the stock would need to trade up to nearly $16, just to reach tangible book value .

Conn's may be a "book value" play, but the whole group can also be seen as a cheap earnings play. They're also awfully cheap on an enterprise-value-to-sales (EV/S) basis.

How cheap? Excluding Conn's, the other three retailers on this table trade for just 3 to 4.3 times trailing EBITDA (earnings before interest, taxes, depreciation and amortization ). The EV/sales ratios of 30% or lower are also extremely low.

These kinds of multiples would seem to highlight real distress for these retailers, but that's simply not the case. Instead, as I noted earlier, these stocks are simply not timely. Some investors will suggest they are out of favor because of Wal-Mart's (NYSE: WMT ) push into consumer electronics. Have you actually tried to buy any electronics at Walmart? Good luck finding a sales person with any clue about what they're selling. (Apologies to the few Walmart sales people that actually have knowledge -- no slight intended to you.) Indeed, the main reason stores like Best Buy (NYSE: BBY ), hhgregg (NYSE: HGG ) and RadioShack (NYSE: RSH ) exist is because they have very knowledgeable sales people that can answer any question, and most importantly, know how to close a sale.

So the Walmart explanation isn't the real culprit here. Instead, it's a combination of high unemployment and a lack of buzz-worthy products (outside of the iPad). Yet that is precisely the time you want to own stocks like this: when investors can see little reason for near-term cheer. These stocks (with the exception of Conn's) trade right near their 52-week lows.

Cash machines
Even as these firms muddle through a tough year, they remain quite profitable: RadioShack has generated an average of $155 million in free cash flow in each of the last four years. This figure stands at $700 million each year for Best Buy. What to do with that money? Each company is in the midst of share buyback programs, figuring that per share profits can be spiked nicely higher as the share count shrinks. Both Conn's and hhgregg prefer to deploy their cash back into the business, opening new stores at a rapid clip.

Searching for catalysts
So what will it take to get these stocks moving? One of two things: Either employment trends need to improve or consumer electronics manufacturers need to create buzz-worthy new products. When employment trends strengthen is an open question. It took awhile in the early part of the last decade as we were coming out of recession , but employment eventually took off by 2003 and 2004. A similar pattern may play out this decade.

But these firms are hardly sitting on their hands, waiting for an economic upturn. Instead, they are trying a raft of new initiatives to drive store traffic. For example, Best Buy is gearing up to make a major push into electric car chargers. The company's "Geek Squad" will be able to install 220-volt charging systems at a consumer's home. In the next year, Ford (NYSE: F ) , Toyota (NYSE: TM ) , Mitsubishi, Fisker Automotive and others will be rolling out electric cars.

RadioShack, which recently installed new leadership, is also looking to spruce up its product offerings. [" 4 Stocks Set for a Second Half Comeback in 2011 "] It recently began selling the iPad (though not soon enough to save what is expected to be a lackluster quarter according to analysts), and you can look for more tablet computers to be stocked as Acer, Samsung, Hewlett-Packard (NYSE: HPQ ) and others roll out models. (It's not clear which firms will work with RadioShack, though the retailer is said to be having discussions with a range of them).

The point here is not that electric vehicles or tablet computers will save the day by themselves. But they highlight the unique role these niche retailers with highly-trained staffs can play as consumer electronic choices become ever-more complex.

Action to Take --> The starkly cheap valuations noted earlier raise another possible catalyst: interest from the Private Equity crowd. These firms love business models with high cash flow and low debt leverage . Regardless of the catalyst , these stocks are undeniably cheap simply because they aren't "timely," which is exactly why you should think about accumulating shares now.

-- David Sterman

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing Investing Ideas
Referenced Stocks: BBY , CONN , F , RSH

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