Are Investors Missing Out on an Opportunity to Buy Retail Stocks?

By Markets Fool.com

Brick-and-mortar retailers have had a rough go of it the past couple of years. Online shopping has made life difficult for many of them, as traditional stores have had to play catch-up with the likes of Amazon.com . This past holiday shopping season underscored this point, as many stores pushed their online presence to mixed results from the market.

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As a result, many retail stores have been beaten down and are trading far below the premium being placed on Internet behemoth Amazon. Are investors rightly pessimistic about the future of retail store fronts, or does the recent downturn present a buying opportunity?

A review of one-year performance
Let's look at retail stores' performance over the past year compared with that of Amazon:

Company

1-Year Stock Performance

P/E (Trailing 12 Months)

P/E (Based on Next Fiscal Year)

Five-Year Earnings Growth Estimate

Five-Year PEG Ratio

Amazon.com

50%

464.1

67.8

40.9%

3.1

Wal-Mart

(18%)

14.5

15.2

0.2%

70.1

Target

7%

17.3

14.0

11.2%

1.4

Macy's

(30%)

11.4

10.8

5.5%

2.1

J.C. Penney

30%

(10.0)

17.3

(28%)

18.2

Kohl's

(35%)

12.4

10.9

6.5%

1.7

Best Buy

(11%)

12.5

10.7

9.6%

1.2

Data as of early March. P/E = price to earnings ratio. PEG = price/earnings to growth ratio. Source: Yahoo! Finance.

Taking a look at the chart, Amazon has far outperformed other players in the retail space over the last year. Using forward P/E and the PEG ratio (which measures the amount an investor would pay for future growth expectations), Amazon is also trading at a premium to competitors. The reason becomes obvious when we look at the fact that analysts expect over 40% growth in earnings in each of the next five years.

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Moving away from Amazon and looking at some of the big U.S.-based retailers paints a different picture. Over the past year, both stock performance and business results for brick-and-mortar stores have been mixed. Earnings growth typically sits in the single to low double digits per year. However, this has led to low PEG ratios, especially when compared with Amazon's 3.1.

The exceptions to the lowPEG ratiowould be Wal-Mart, J.C. Penney, and Macy's. All three of these companies have lagged in the last year, and growth outlook for all three companies are poor. As a result, the PEG ratios are high and would indicate current stock valuations are over-optimistic.The reasons for thisare many. J.C. Penney has had a fabled story, as it continues to recover from a failed attempt at changing its business model a few years back. Wal-Mart, dealing with a slowdown in sales growth, continues to close underperforming locations, both in the United States and abroad. Macy's has had similar problems, as management continues to execute on its plan to close locations and boost profitability. As long as these three companies continue to post apoor outlook for business growth, I would steer clear.

A long-term opportunity?
U.S. consumer spending has been on a steady increase for the past few years, up approximately 15% since 2009. As the U.S. economy continues to heal, retail spending will grow.

I believe there are long-term opportunities for investors here. I like to use the PEG ratio to make decisions on which companies I invest money in. There appears to be a value when comparing traditional retailers' PEG ratios with online competitors such as Amazon. With expectations of 40%-per-year profit growth and a PEG ratio of as much as three times higher than traditional stores, overoptimism about future growth seems to be the overarching theme. Companies that have underperformed in the last year, despite an outlook of future profit growth, seem to be the better investment at the moment for those willing to tune out the noise and hold for the long run.

The article Are Investors Missing Out on an Opportunity to Buy Retail Stocks? originally appeared on Fool.com.

Nicholas Rossolillo owns shares of Target. The Motley Fool owns shares of and recommends Amazon.com. 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.