Alan Brochstein looks at retailers down sharply from the highs.

As I have said before, years of watching the fortunes of retailers ebb and flow have taught me that one way to succeed in picking among the stocks is not to chase winners, but rather to pick them up when they have disappointed.  In other words, when it comes to being a buyer of retailers, it can pay to buy things “on sale”.  It’s not as easy as just buying what’s down, because you don’t want to end up with a company that has lost its edge permanently.  While the Consumer stocks in general have been performing well as investors see improving consumer sentiment and stabilizing input costs and seek companies with perhaps more domestic focus, the performance within the sector has been quite diverse. 

With the goal of finding some special “mark-downs”, I ran the following screen:

  • Market Cap > $500mm
  • Price < 65% of 52-week High (down at least 35%)

Here are the 16 names that made the cut, sorted by their decline from the 52-week high:




Please remember that these are not recommendations.  You should always do a thorough investigation of any company before investing in it.

 

I have included several data items (source = Baseline) to help refine the list further.  Several of the companies have less debt than cash and investments, and I have highlighted them in green.  On the other hand, a few of the companies have substantial debt. While the presence of debt isn’t necessarily a red flag, I do caution that the companies with heavier debt loads could be riskier.

 

I have included price returns over the past 3 and 12 months as well, highlighting those names that have advanced more than the market over those time-frames.  Two of the stocks have outperformed the market over the past year, while one of those and two others have shown good relative performance over the past three months. 

 

I highlighted two valuation parameters.  I don’t believe that PE is always the most reliable indicator, but three of the stocks have below-market PEs (I have highlighted those below 10PE), while five have either high or negative PEs.  In the case of the two marked “NM”, analysts project losses over the next year, which creates some additional risk.  When stocks aren’t performing well, the price to tangible book value metric can be helpful in assessing value.  I have highlighted in green those stocks at 1.5X or less, while highlighting in red those with either very high or perhaps negative ratios.

 

Some of the companies are growing quite strongly, which is often a good sign.  Several, though, have seen sales decline, which is cautionary.  Stagnant sales combined with debt (like Sears (SHLD), Collective Brands (PSS), and Jones Group (JNY)) can suggest extreme challenges.

 

Finally, I have highlighted in green all of those stocks with short-interest ratios in excess of 10% - most of the list.  High short-interest isn’t necessarily good – sometimes it indicates a problem.  I am viewing it as a potentially positive factor, though, as short-covering can provide powerful support to a stock.  These marked-down companies are heavily shorted.

 

I follow only Skecher’s (SKX) closely, and it appears to be near the end of an inventory adjustment after getting caught with too many toning shoes in late 2010.  I wrote about this company a year ago and was wrong to be enthusiastic at the higher price then, but I continue to expect that the future will be brighter.  The company reduced a substantial amount of inventory in 2011 without reducing equity.  It is the only stock trading below tangible book value on the list.

 

Other names that jump out at me in terms of priority for further research would include RadioShack (RSH), which looks very inexpensive, Rue21 (RUE), which is a 2009 IPO that has strong growth still but was too expensive previously (> 30 PE), and Columbia Sportswear (COLM), which has shown strong growth and is valued reasonably.

 

Screening is a tool to identify stocks to study more closely for potential investment.  In this case, we have looked at 16 stocks that have pulled back sharply from the highs over the past year.  While several of these companies have favorable characteristics, others look to face some challenges.


Regards,

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

 

Disclosure:  No positions in any stock mentioned

 

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Alan Brochstein maintains a cross-marketing relationship with TradeKing.

 

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