2 Oversold Stocks in Retail Poised for a Turnaround

By Markets Fool.com

Pundits on Wall Street love to throw around the term oversold to identify stocks that have sold off and are thus thought to be trading below their intrinsic values.

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However, not all "oversold" stocks are worthy investments. Many times the market has punished those stocks for a reason, and buying them can come back to bite investors down the road. Therefore, to help you sort the winners from the losers, I've outlined two oversold retail stocks that are poised for a comeback in the year ahead.

Retail therapy
Coach
may have a fresh line-up of hot summer purses and fragrances, but its stock could use some love these days. Shares of the luxury handbag and accessories maker have fallen nearly 10% in the past year. Moreover, the stock is now trading around $42: more than 16% below its 52-week high. Nevertheless, this is a notable improvement from just six months ago, when shares of Coach were trading at levels not seen since the depths of the Great Recession.

Coach is transitioning to a "lifestyle" brand like rival Michael Kors. Source: The Motley Fool.

Now that the retailer's turnaround efforts are underway, long-term investors may want to consider adding this name to their shopping carts at today's discounted stock price.

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Investors have punished the luxury retailer in quarters past because of weak sales and declining profit margins. Part of the stock's weakness was driven by concerns over increased competition from rival fashion brand Michael Kors . However, Coach is actively restructuring its business today by closing underperforming locations and opening new Modern Luxury stores that expand beyond its core offering of handbags into categories such as ready-to-wear, shoes and fragrance.

This should help the retail chain better compete with Kors, which has dominated the fashion scene in recent years with its lifestyle branded apparel and accessories business. Growth overseas is another thing that could spark new life in shares of Coach going forward. The bulk of Coach's business is in North America today, where it has 532 company-operated stores. Japan and China are currently the retailer's second and third largest markets.

Coach's biggest future opportunity is in Europe, where it only recently began to gain traction. Coach opened 3 new stores in Europe during the December quarter, bringing its store count there to just 31. That compares to 125 European stores for rival Michael Kors. Coach's total sales in Europe grew at a double-digit clip during the holiday quarter. Coach, therefore, has plenty of room left to grow in Europe in the quarters ahead and the initial results look promising.

With shares of Coach now trading around $42 a pop, it could be a winning bet for long-term investors.

Turning a new page
Office supplies chain Staples is another beaten down stock that I believe is worth your attention. Staples stock has plummeted nearly 11% so far this year, leaving shares trading around $16 apiece or 17% below the stock's 52-week high. The market has punished Staples as sales have slowed and increased competition from online retailers such as Amazon has forced it to lower prices, thereby weakening Staples' profit margin.

Source: The Motley Fool.

Despite these challenges, the recent pullback in shares of Staples offers long-term investors an attractive entry point. Staples is in the process of cutting costs and closing underperforming locations, which should help the retailer increase earnings and profitability down the road. In fiscal 2014, for example, Staples closed 152 U.S. stores and 17 stores in Canada. The company now operates around 1,679 locations throughout North America.

Staples' $6.3 billion bid for office supplies rival Office Depot is another potential catalyst for Staples because it would help the company better compete with more nimble online competitors.

The FTC is currently reviewing the deal. However, don't expect a repeat of Staples' 1997 attempted merger with Office Depot in which the FTC blocked the deal. People familiar with the latest deal are confident that regulators will approve it because of recent changes in the competitive landscape, according to Reuters.

Staples' management says the deal would mean at least $1 billion in cost savings for the combined company. In the meantime, Staples isn't resting on its laurels. The big box office chain recently announced a strategic partnership with Martha Stewart Living. With Martha Stewart office products available exclusively in Staples stores beginning in November, the collaboration could drive increased sales and traffic in the months ahead.

Solid long-term picks
Coach and Staples represent two vastly different parts of the retail landscape today. However, both offer investors strong brands that have proven their respective turnaround efforts are successfully underway. Given the catalysts outlined above, both stocks should rebound nicely in the quarters ahead.

The article 2 Oversold Stocks in Retail Poised for a Turnaround originally appeared on Fool.com.

Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach, Michael Kors Holdings, and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.