You don't want to be loading up on retail stocks right now.
Signs are emerging that the back-to-school shopping season will be
lackluster, and the mid-term outlook for the end-of-year holiday
shopping season is likely to be equally sobering.
The dim outlook has already been discussed by an increasing
number of
Wall Street
analysts. Earlier this week, for example, Deborah Weinswig, retail
analyst for Citigroup, lowered her 2012
profit
forecasts for
Kohl's (NYSE:
KSS
), Macy's (NYSE:
M
), J.C. Penney (NYSE:
JCP
) and Target (NYSE:
TGT
)
. Look for more estimate cuts from other analysts in coming weeks
and months.
Yet you may want to keep a very close eye on this sector,
because a curious phenomenon is likely to happen again. Whenever
investors begin fleeing retail stocks, they often punish them far
too much -- at least by one key measure. I'm talking about
their
market value
in relation to their assets -- especially
inventory
. On occasion, investors push a stock down so far that it is
actually worth less than a company's merchandise. This sets up the
bounce back trade as value investors go hunting.
Off-price retailer
Tuesday Morning (Nasdaq:
TUES
) is a great example. The company carries more than $200 million in
inventory on its books, and at the start of 2012, the entire
company was valued at just $125 million. Investors eventually
spotted that anomaly and
shares
are up more than 80% since late January.
In a similar vein, I noted the unusual
price action
in electronics retailer
Conn's (Nasdaq:
CONN
) in this column from June 2011. Shares have risen 177% since
then.
In the past few trading sessions, Conn's rival
hhgregg (NYSE:
HGG
)
has entered into the same "well below inventory" territory. The
retailer recently warned that 2012 profit targets would not be met
as sales had slowed. This retailer's market value stood at roughly
$600 million in late 2011, but is now just $255 million. In their
zeal to dump the stock, investors have pushed the company's value
below the $282 million in inventory that stood on the books at the
end of March. Add the fact that hgregg also has roughly $60
million in net cash, and the valuation gap becomes especially
stark. The $359 million tangible
book value
for this retailer is 40% higher than the
market
worth. Value investors will likely eventually
spot
this disconnect and bid shares back up from a recent $7 toward the
$10 mark.
Other examples include:
• Ingram Micro (NYSE:
IM
)
This reseller of office equipment carries $3.2 billion in inventory
and has $700 million in net cash. Tangible book value stands at
$3.36 billion. (All figures are prior to a recent announcement that
the company will acquire cell-phone distributor
Brightpoint (Nasdaq:
CELL
)
for $650 million). Yet Ingram Micro is valued by investors at
just $2.48 billion.
• Office supply chain retailer
Office Depot (NYSE:
ODP
)
is also trading at a deep discount. Its $550 million in book value
is just a fraction of the $1.1 billion in inventory. Tangible
book value stands at $718 million.
Risks to Consider:
As noted, retail stocks could fall a bit further as
second-quarter results -- and the forward outlook -- are digested,
so this is a good time to prepare for the compelling values to
come.
Action to Take -->
Office Depot, Ingram Micro and hhgregg are current examples of
balance sheet
bargains. With pillars of value in place, these stocks have limited
downside as this point with potentially robust upside once the
near-term retail doldrums abate. Look for other retailers to join
this list in coming weeks. As the examples of Conn's and Tuesday
Morning highlight, considerable gains may lay ahead for these
beaten-down stocks.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of TGT in one or more if its "real money" portfolios.