In baseball lore, few events are as celebrated as Babe Ruth's
"called shot". The story goes like this: In the fifth inning of
Game 3 of the 1932 World Series, Ruth came to the plate, and, while
engaged in some serious back-and-forth jawing with Chicago Cubs
players, pointed to Wrigley Field's centerfield bleachers as if to
say, "That's where I'm hitting the next pitch." Then, incredibly,
he did just that, crushing a home run that gave the Yankees the
lead -- and Ruth's legend one of its signature moments.
There's just one small problem: The called-shot story may well
be completely false -- over the years, plenty of eyewitnesses,
including some of Ruth's teammates, have cast doubt on it. But once
one reporter portrayed it that way, others followed, and soon the
facts didn't really matter. Many, if not most, baseball fans simply
accepted it as true.
That's not uncommon. As human beings, we want to believe in
stories. In a world full of unpredictability and chaos, we look to
stories to give us understanding, to give us a sense of order.
(Barry Ritholtz has a great column on this on The Big Picture
blog.) That's all well and good when it comes to a baseball legend.
But in the investing world, putting stories ahead of facts is very
dangerous. Since the 2008 financial crisis, for example, investors
have been giving credence to a number of fear-filled stories. One
of the most prominent: the tale of the tapped-out American
consumer. According to this story, the housing market crash, stock
market implosion, and near-collapse of the entire financial system
dealt U.S. consumers a knockout blow in 2008, one from which they
wouldn't be able to recover for years, perhaps even decades. Huge
declines in consumer spending would mean years of struggle for the
economy, and for retail firms in particular.
Like most tall tales, the tapped-out-consumer story was grounded
in some truth -- Americans did cut back spending significantly amid
the crisis, and they were overleveraged. But amid the fear-filled
climate of 2008 and 2009, the tale spun a bit out of control, in
part because it provided a great story arc -- after years of
overspending and living high on the hog, Americans were getting
their comeuppance. Forget Gucci handbags and Prada shoes; citizens
of the most powerful country in the world would soon be on the
verge of scavenging for food and weaving clothing out of leaves and
branches. What drama!
Who knows -- had a few things gone differently, perhaps that
scenario would have played out. But it didn't. Consider these
facts: While they trended downward from December 2007 to April
2009, real personal consumption expenditures have been on the
rebound ever since, and are now 4.7% above that December 2007 peak.
Retail sales, meanwhile, are 11.8% above their November 2007 peak.
And after climbing above 14% in mid-2007, Americans' collective
debt service ratio (the ratio of outstanding mortgage and consumer
debt to disposable personal income) has fallen to 10.32% in the
fourth quarter of 2012 and 10.49% in this year's first quarter.
Those two most recent readings are the lowest the ratio has been at
any time since 1980.
Still, the tapped-out-consumer story lingers. And that's good.
Because when the story and the facts diverge, opportunities are
created. Right now, my Guru Strategies -- which are based on the
approaches of some of history's greatest investors -- are finding
great value in the retail apparel industry. In fact, it's the
top-ranked industry in the market according to my Validea Industry
Index, which ranks industries based on a composite of growth and
value factors. Here's a look at a handful of apparel retailers that
my models think aren't getting enough love -- likely because of the
rue21, inc. (
This trendy Pennsylvania-based specialty apparel retailer caters to
11- to 17-year-olds. It recently opened its 700th store in the
U.S., operating in 46 states. It has a market cap of about $1
rue21 gets approval from my Peter Lynch- and James
O'Shaughnessy-based models. While the stock's P/E doesn't look
cheap -- it's about 24 -- Lynch believed that higher P/Es were
merited if the company was growing quickly. And rue21 has been
growing earnings per share at a 30.1% pace over the long haul (I
use an average of the three-, four-, and five-year EPS growth rates
to determine a long-term rate.) That makes for a P/E-to-Growth
ratio (a metric Lynch developed) of 0.8, which comes in under this
model's 1.0 upper limit -- a sign rue21 is a bargain.
My O'Shaughnessy-based growth model looks for firms that have
upped earnings per share in each year of the past five-year period,
which rue21 has done. The model also looks for a key combination of
variables: a high relative strength, which is a sign the market is
embracing the stock, and a low price/sales ratio, which is a sign
it hasn't gotten too pricey. Rue21 has a solid 12-month relative
strength of 82, and its P/S ratio of just 1.07 comes in well below
this model's 1.5 upper limit.
Coach Inc. (
This New York City-based luxury handbag maker actually wasn't hit
too hard during the Great Recession, and it has thrived since then.
The $17-billion-market-cap firm is a favorite of my Warren
Buffett-based model. It looks for firms with lengthy histories of
earnings growth, manageable debt, and high returns on equity (which
is a sign of the "durable competitive advantage" Buffett is known
to seek). Coach has upped EPS in all but one year of the past
decade, has less than $1 million in debt vs. over $1 billion in
annual earnings, and has averaged an ROE of 37% over the past ten
years, so it makes the grade.
Coach also gets high marks from my Lynch-inspired strategy. For
moderate-growth, dividend-paying companies, Lynch added dividend
yield to the "G" portion of the PEG ratio. Coach's 16.1 P/E, 2.3%
yield, and 17.1% growth rate make for a solid yield-adjusted PEG of
The TJX Companies, Inc. (
The parent of discount retailers that include Marshalls and T.J.
Maxx has done exceptionally well in recent years. The
$37-billion-market-cap company has grown EPS in each year of the
past decade, one reason it's a favorite of my Buffett-based model.
Two more: It has also averaged a 37.5% return on equity over the
past decade, and its annual earnings are more than its long-term
My Lynch-based model also likes TJX. The firm's 19.8 P/E and
23.8% long-term growth rate make for a solid 0.83 PEG ratio.
Genesco Inc. (
Nashville-based Genesco sells footwear, headwear, sports apparel
and accessories in more than 2,455 retail stores throughout the
U.S., Canada, the U.K, and Ireland under such names as Journeys,
Schuh, Lids, and Johnston & Murphy. The $1.7-billion-market-cap
company has taken in more than $2.5 billion in sales over the past
Genesco gets high marks from my Lynch model, which loves its
15.9 P/E and 39.9% growth rate, which make for a 0.4 PEG. It also
likes the firm's minimal 6.5% debt/equity ratio.
The Men's Wearhouse (
The Houston-based retailer, which recently acquired Joseph Abboud
menswear -- and replaced co-founder and executive chairman George
Zimmer -- sells a variety of bargain-priced suits and rents
tuxedos. It has a $2 billion market cap.
Men's Wearhouse is another favorite of my Lynch-based model.
It's grown EPS at a 21.2% rate over the long haul and has a 14.8
P/E, making for a strong 0.7 PEG. It also has no long-term
I'm long TJX and COH.