Stock Quotes in this Article: PSUN, ZUMZ

MINNEAPOLIS (Stockpickr) -- I had the opportunity to take my 7-year-old daughter clothes shopping recently. It is one of my favorite parenting activities. I enjoy watching her discover her own style and helping her pick out different outfits, and I appreciate the smile on her face when carrying the packages from the store.

Her favorite store is Justice, but we spent most of our time at J.C. Penny (JCP). She loves the brand, but I love the discounts. Anything with a peace sign on it caught her eye. I didn’t realize she had become such a beatnik.

The preteen or tween retail space is red hot. Granted it was during the still after the holiday flurry of bargains, but I was surprised at how crowded the stores were. From a stock perspective I guess that should have been expected.

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    Retail stocks have been some of the best performers during the past year. The S&P retail index was up more than 30% in 2010, greatly exceeding the performance of the overall market. That strength came from strong consumer spending throughout the year.

    Several names in the retail space dropped significantly in early January when December sales numbers failed to impress. Had stocks in the group reached a peak or was the news an excuse to take a pause before extending the impressive 2010 returns?

    It will not be enough to own a broad swath of the industry in 2011. Instead, investors in teen retail need to be selective. It will be a stock picker's market in the coming year. Here are three names to consider.

    Ascena Retail Group

    If my daughter has any instincts on trends, I would say the future for Justice owner Ascena Retail Group (ASNA), which operates some 900 Justice stores as well as Dress Barn and Maurices, is a good place to start.

    I'd never heard of Justice before my daughter brought the name to my attention. I was impressed. Ascena Retail Group

    Shares of ASNA did not fare as well as the rest of the group in 2010. Its shares were up approximately 12% for the year. They gave up some of that gain in early January but have since recovered.

    Going forward, analysts expect Ascena to make a profit of $2.24 a share in the year ending July 2011, with 8% growth to $2.42 a share in the next year. Shares trade for 12 times the first number and 11 times the latter.

    That is a fair price if earnings are expected to jump by only 8% as is currently estimated. It is a cheap price if earnings are significantly higher. Here is a retail stock yet to catch fire in the current recovery.

    With its hot brand Justice, now may be a good time to buy Ascena. My guess is that in 2011, operating performance will beat expectations. With a cheap valuation, I’m protected on the downside if I am wrong.

    TheStreet Ratings rates Ascena a B+ buy.

    Pacific Sunwear

    Pacific Sunwear (PSUN) has had a rough go of it over the last two years. The once trend-setting company lost its relevancy and nearly failed at the depth of the recession and financial crisis. Whatever the reason, this company lost its competitive edge.

    After hitting rock bottom, the company has been attempting a recovery. Shares have rebounded from a below $1 per share price to peak at close to $7 per share in 2010. PSUN was a big winner in 2010, up nearly 50% for the year.

    In early January, PSUN cut guidance for its fourth quarter, citing weak sales in its women’s category. The company now expects an adjusted loss of 31 cents to 34 cents a share. The prior expectation was for a loss of 7 cents to 18 cents a share. Investors ran for the exits, and the stock was down more than 13% after the news.

    Analysts now expect PSUN to lose 91 cents a share for the year ending January 2011 and 49 cents a share for the following year. The news is not good for investors. Only a bull market is helping to support a stock that is still struggling.

    It is never a good sign for a company to reduce guidance in the middle of a turnaround. This is exactly the kind of stock to avoid in the current environment.

    Pacific Sunwear shows up in the portfolio of Richard Perry at Perry Capital as of the most recent reporting period. It's rated a D sell by TheStreet Ratings.

    Zumiez

    Gladly picking up the slack for PSUN is the red hot Zumiez (ZUMZ). This teen retailer was one of my top stock picks for 2010, and it did not disappoint. In fact, Zumiez and its 111% gain for the year posted the best return of any top stock pick in the four years of my doing such lists.

    Those gains made the stock a bit pricey, and I did not consider the stock for inclusion on my list of 10 Top Stocks for 2011. The exclusion proved astute. In early January, the company reported disappointing same-store sales numbers for December.

    Shares lost almost 10% in the immediate aftermath of the disappointing numbers and have continued to lose value since. After the stock traded for $30 in 2010, investors can buy shares of Zumiez for approximately $23 in the current market.

    The big selloff has taken some of the froth from Zumiez’s valuation. Analysts expect the company to post a profit of 86 cents a share in the year ending Jan. 31, 2011. In the next year, that number is expected to grow by nearly 20% to $1.03 a share. Shares now trade for 27 times the first number and 23 times the latter.

    Those are reasonable numbers given the expectation of near-20% growth. Investors rightly question whether Zumiez can sustain such growth or whether the company will follow a similar path seen at Pacific Sunwear.

    With the economy gaining further traction on the growth front there is more room for Zumiez to expand. This stock is a hold in my opinion. I would not buy at current prices, but I would not sell at these reduced levels. I suspect by the end of 2011 the stock trades right about its 2010 peak of $30.

    According to Jeanine Poggi, Zumiez was one of the 10 top retail stocks of 2010. It's rated a B buy by TheStreet Ratings.

    To see these stocks in action, check out the Teen Retail Trades portfolio.

    -- Written by Jamie Dlugosch in Minneapolis.

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    At the time of publication, author had no positions in stocks mentioned.

    Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.