The retailer stocks have been hammered so hard, due to low sales expectations for the holiday season, that the metrics on these stocks have become very favorable.
If these companies surprise on the upside by reporting revenues and earnings higher than expected, they could exhibit some strong price increases. (Marek Fuchs recently wrote an article for TheStreet.com about the media coverage of Black Friday.)
Stockpickr has reviewed all the major retailers and created the Santa Portfolio, which includes ten top retail stocks -- all but one of which has a price/earnings-to-growth (or PEG) ratio less than one.
One of the retailers with some of the best metrics is Abercrombie & Fitch (ANF) with a very low P/E ratio of 4 and an extremely low PEG ratio of 0.49. They recently reported a 46% drop in their third-quarter net income to $63.9 million, or 72 cents a share, slightly beating analysts' expectations of 71 cents per share. It even pays a dividend yield of 3.6%.
The stock is owned by the Columbia Acorn Select Fund, which is a long term capital appreciation fund managed by Ben Andrews. Columbia Acorn Select invests in the stocks of companies with market capitalizations of less than $5 billion. Other fund holdings include ITT Educational Services (ESI) with a P/E of 19, SkillSoft (SKIL) with a P/E of 10 and Potash (POT) with a P/E of 6 (and is favored by Guy Adami on Fast Money).
Another retailer with upside potential is J. C. Penney (JCP), which has a P/E ratio of 5 and a PEG ratio of 0.71. The company reported that their third-quarter earnings dropped by 52% but their results beat analysts' estimates. JCP also pays a fairly high yield of 4.1%.
J.C. Penney happens to be owned by activist investor Carl Icahn, who got his start as a corporate raider in 1985, with his hostile takeover of TWA. He was recently in the news for buying $66.9 million of stock in Yahoo! (YHOO). Icahn also owns Motorola (MOT, forward P/E: 39), Anadarko Petroleum (APC, P/E: 7) and Biogen Idec (BIIB, P/E: 16), which was recently downgraded from a Buy to a Hold by TheStreet.com Ratings.
Another retailer with excellent financials is American Eagle Outfitters (AEO) , which has a P/E of 6, a PEG of 0.65 and a yield of 4%. The stock was recently mentioned by the Fast Money panel as a trading play.
Will Santa give investors an upside surprise this year?
Now that Black Friday has passed, along with the following Saturday and Sunday shopping days, the media seems to have different interpretations about what the results were, however the consensus seems to be that shopping was fairly typical of a recession and there are some signs of strength.
Here are a few more top retailers that are worth doing some comparative shopping on.
The Cincinnati, Ohio-based department store, Macy's (M), is down over 70% for the year, but the stock has a very low P/E ratio of 4 and a PEG ratio of 0.59, which is much better than the industry average of 0.83. The company also pays a fairly high yield of 7.1% (based on previous dividend payments).
Macy's is owned by Okumus Capital, which was founded by Ahmet Okumus in 1997. Okumus utilizes the Graham and Dodd style of value investing and the fund has reportedly had a return of almost 35% net per year since its inception. Other stocks Okumus owns include Cadence Design Systems (CDNS) with a P/E of 5, CA (CA) with a P/E of 13 and Quest Software (QSFT) with a P/E of 20.
Another retailer in the Santa Portfolio is the high-end fashion specialty retailer Nordstrom (JWN) which has a very low P/E ratio of 4 and a PEG ratio of 0.61. The stock pays a yield of 5.6%.
J. Crew (JCG) is an apparel retailer that had their price target cut by Credit Suisse to $14 from $29, primarily due to the company's weak guidance, however, they have maintained their Outperform rating. The stock has a P/E ratio of 6 and a PEG ratio of 0.72.
Kohl's (KSS) is one of the department store chains that offered deep discounts and extended hours on Black Friday. They have a P/E ratio of 9 and a PEG of 0.83.
One stock that was recently upgraded by Citigroup from a Hold to a Buy is The Gap (GPS), due to its clean balance sheet and reductions in expenses. The stock has a P/E ratio of 9 and a PEG ratio of 0.86. They also pay a decent yield of 2.6%.
The large discount store Target (TGT) is owned by Activist Hedge Fund Manager Bill Ackman of Pershing Square Capital Management, who has generated returns of 40% or more over the past two years. If you want to piggyback on Pershing Square's investments, you should look at their other holdings, such as EMC (EMC) with a P/E of 14 and Wachovia (WB) with a forward P/E of 4.
The only retailer stock on the list that is up for the year is Wal-Mart (WMT). The stock has a P/E of 15 and a PEG ratio of 1.41. They have a yield of 1.7%.
For the complete list of ten retail stocks, go to the Santa Portfolio on Stockpickr.
Posted on Dec. 2, 2008
