Santa Claus is coming to town. Just
not your town. Or my town, if you believe all you read.
That’s right, a humbugian tone weighs
over the predictions about this retail season, and it’s got investors
anxious. But considering how wrong the consensus view has been, it’s
amazing anyone pays heed anymore. I’ll stick my neck out and be the
token optimist and opine on retail as a whole. (Per usual, I will not
be specifically mentioning any stocks that we have an interest in, or
ownership of).
1) First, I believe year-end retail
figures will come in slightly better than expected. This will come
anecdotally at first, and by early next year, you’ll hear the
collective figures that support this. Right now, expectations are very
low--which allows a little good news to go a long way for retail
stocks.
2) Most retail stocks are still cheap,
and haven’t priced in either continued strength in the sector, nor a
broad economic recovery. That’s two prospective positive surprises,
set up for the next three months--so be ready.
3) Conversely, many retail stocks are
NOT cheap, and stocks in this sector fall prey to many of the same
trend-behaviors as the products they sell. In other words, retail
stocks tend to be hot or cold, depending on what’s in, with a few
stalwart companies and brands than hold up throughout. But do to
suppressed margins, earnings are in a trough now, and that inflates
valuations.
4) The best way to judge compare all
retail stocks across sub-industry spectra, on the same yardstick, is
to use the P/E-to-Growth (PEG) measure. Divide stock price by
future-four-quarters' earnings (consensus estimates) divided by
5-year-projected earnings growth rate. Average PEGs in retail tend to
be about 0.90. Below that is better, above that is worse.
Using PEG, you see that Gap (GPS) is
actually still surprisingly expensive (PEG = 1.7), even though the
stock’s been clobbered. It also say’ white-hot Chico’s FAS (CHS) isn’t
as expensive as you’d expect from a stock that’s up ten-fold in two
years (PEG 0.9--but it also says it's not cheap). Other PEGs include
(in descending order):
|
Company |
Ticker |
Stock |
Growth |
EPS |
PEG |
|
Sears |
S |
$ 25.85 |
10% |
$ 5.30 |
0.49 |
|
Dillards |
DDS |
$ 16.55 |
9% |
$ 2.52 |
0.73 |
|
Federated |
FD |
$ 29.32 |
10% |
$ 3.82 |
0.77 |
|
The Limited |
LTD |
$ 15.00 |
13% |
$ 1.18 |
0.98 |
|
Target |
TGT |
$ 31.80 |
15% |
$ 2.06 |
1.03 |
|
Ross Stores |
ROST |
$ 45.35 |
15% |
$ 2.85 |
1.06 |
|
Family Dollar |
FDO |
$ 30.00 |
18% |
$ 1.56 |
1.07 |
|
May Dept. Stores |
MAY |
$ 23.50 |
9% |
$ 2.29 |
1.14 |
|
Kohl's |
KSS |
$ 61.10 |
23% |
$ 2.28 |
1.17 |
|
Costco |
COST |
$ 28.68 |
14% |
$ 1.75 |
1.17 |
|
JC Penney |
JCP |
$ 24.75 |
11% |
$ 1.69 |
1.33 |
|
Walgreens |
WAG |
$ 28.93 |
17% |
$ 1.20 |
1.42 |
|
Nordstrom |
JWN |
$ 19.31 |
9% |
$ 1.42 |
1.51 |
|
Martha Stewart Omnivision |
MSO |
$ 10.59 |
16% |
$ 0.41 |
1.61 |
|
Saks |
SKS |
$ 12.82 |
9% |
$ 0.88 |
1.62 |
|
Walmart |
WMT |
$ 51.94 |
14% |
$ 2.05 |
1.81 |
|
Word of caution:
growth-rate adjusted valuations are only one piece of the puzzle.
Consider that projecting growth rates five-years-out is like
projecting the weather five-weeks-out. Also, as in the case of Sears
and such, other events are overwhelming stock price and earnings level
consideration. Caveat emptor is more than just a double entendre here.
It’s the whole game.
At the time of
publication, the author was neither long nor short any of the stocks
mentioned in this article, either in client accounts or personal
ones. Positions may change at any time.
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