Stock Market Video
Ten Retail Stocks for the Holiday Season Investor
Bad Decisions Make Good Stories
In Case You Missed It
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In honor of the Thanksgiving holiday, there won’t be a video review this week. But we’re including a link to Mike Cintolo’s trading video that will give you some insight into how Cabot’s growth disciplines help you to find winning growth stocks. Click below to watch the video!
Ten Retail Stocks for the Holiday Season Investor
Of all the traditions of the Thanksgiving holiday, one of most recent is also one of the most popular. That would be Black Friday, the day when bargain shoppers pull on their elbow pads and lace up their steel-toed boots and head for their local Big Box retailers in search of major bargains. By the time you read this, Black Friday will be just a memory, although the bruises may be with you for a while yet. You can either spend the weekend gloating over your great purchases or gird up and head for the mall again.
By the way, it’s just an urban legend that the day got the name Black Friday because it was the day when most retailers became profitable (went from red ink to black ink in the traditional ledger sense) for the year. Most profitable retailers make money in each quarter of the year, not just the last.
But the usage has a long history in the U.S. dating back to the Black Tuesday of the October 29, 1929 stock market crash. Another market crash on October 19, 1987 is often called Black Monday. There has also been a Black Sunday, referring to April 14, 1935 that is remembered for its particularly nasty dust storm during the Dust Bowl years. In fact, every day of the week has picked up a dark signifier over the years.
These days, Black Friday is firmly established as the biggest retail sales day of the year, and the favorite day of shopaholics everywhere.
Retail is such a big deal in the U.S. that people who don’t follow the fortunes of retailers at any other time of the year actually follow news reports about holiday spending as a way to gauge consumer confidence and, indirectly, the strength of the U.S. economy.
So I thought this would be a good time to highlight 10 retail stocks that stand to do well in a gradually strengthening economy.
My list includes five stocks that are attractive from a growth standpoint and five that qualify as value stocks for longer-term investors.
These Growth Picks are taken from recent issues of Cabot Top Ten Trader. All of these companies employ bricks & mortar stores, catalogs and online shopping venues to maximize their exposure. Their biggest appeal is their potential for rising stock prices.
Abercrombie & Fitch (ANF) is a specialty retailer with a flair for shocking catalogs and a big appeal for younger shoppers. The company’s four brands—Abercrombie & Fitch, Hollister, Abercrombie Kids and Gilly Hicks—all have seasonal sales trends, with one big spending push during Back to School and the other during December. Abercrombie & Fitch ran into trouble last year, and ANF hit a triple top at 78 during 2011. The stock began a steep correction in November, finally bottoming at 29 last summer. The big recovery came when Abercrombie reported a 53% jump in Q3 earnings and ANF popped from 31 to 42 on November 14. With positive momentum on its side, a good Holiday sales season could fuel another big advance. A 1.7% forward annual dividend yield sweetens the pot.
Chico’s FAS (CHS) is a women’s retailer whose Chico’s, White House/Black Market and Soma Intimates stores cater to different demographics. Chico’s targets women 35 and up; White House/Black Market is aimed at women 25 and up; Soma offers bras, panties and sleepwear for all women. The company has also acquired the Boston Proper brand of high-end apparel. Chico’s FAS has kept revenue growing: 8% in fiscal 2010, 11% in 2011 and 15% in 2012. The latest quarterly report featured revenue growth of 18% and earnings growth of 39%. CHS had a huge jump in July and August, running from 13.5 to 19.5, and has traded sideways since then, waiting for the next catalyst. Its 1.4% dividend doesn’t hurt, either.
Gap Inc. (GPS) is a much bigger company than Abercrombie or Chico’s, and its Gap, Old Navy and Banana Republic clothing stores are familiar sights in the U.S. and well-represented worldwide. While the company has always been consistently profitable, revenue and earnings growth stalled from Q2 2011 through Q1 2012. But GPS caught fire in early 2012 and shot from 18 in February to 38 in October. Investors like what they’re seeing in the refocused product lines in the flagship stores and the diversification in the relatively new specialty stores like GapKids, babyGap, GapMaternity and GapBody, as well as the Piperlime online fashion boutique and the Athleta line of women’s performance gear. There’s also a 1.5% dividend to keep in mind.
Michael Kors (KORS) is the youngest stock in the group, coming public in December 2011. And unlike most young stocks, which need a little time to organize their first real rally, KORS blasted off from its IPO price of 20 and didn’t stop until it hit 50 in March. It’s easy to understand why, as the company’s revenue growth—58% in fiscal 2011 and 62% in 2012—has been phenomenal. And the most recent quarter featured 74% revenue growth and 96% earnings growth! Michael Kors is working the luxury end of the spectrum with apparel, footwear and accessories that are sold on both the retail and wholesale levels. After a five-month consolidation that found support at 37, KORS popped to new highs again in August, and has been digesting those gains with support at 50. I think, over time, it could be another Coach.
Whirlpool (WHR) is the “something completely different” for this list of growth stocks. Whirlpool is an appliance maker that’s been around since 1898 and now owns the Whirlpool, Roper, KitchenAid, Amana, Maytag and other brand names. Whirlpool’s revenue growth has been very slightly negative for the last four quarters, but the improving economy has allowed the company to stop the heavy discounting that was necessary to get sales. As a result, the last three quarters have featured earnings growth of 120% in Q1, 91% in Q2 and 521% in Q3, as improved margins have worked their magic. Investors like the linkage between Whirlpool’s appeal and the strengthening economy (especially the housing market) and the company’s 2.0% forward annual dividend rate.
These Value Picks are all taken from the pages of Cabot Benjamin Graham Value Letter, and are selected because they are trading below their true value, based on future sales. Value stocks are intended to be held for a longer period of time and should be sold when they reach their minimum sell price.
Apple (AAPL) is a bit of a surprise as a value stock, but that’s what happens when a stock drops from near 700 to the mid-500. Apple’s iPhones, iPads, iPods, iMacs and Mac computers are instantly recognized design icons, and they have triggered year after year of double-digit revenue growth. The most recent year saw revenues up 27% and earnings growth of 23% over the previous year. AAPL has rumbled from 78 back in 2009 to 700 in September. But a rare earnings miss caused AAPL to plummet, lowering its P/E ratio to a mouth-watering 13, and editor Roy Ward expects the stock to hit its minimum sell price of 972 within two years. Apple also initiated a dividend for the first time this year and the forward annual yield is 1.9%. Needless to say, plenty of Apple devices should be flying out of stores this season. You can buy AAPL anywhere under 639.
Bed Bath & Beyond (BBBY) is a fairly big specialty retailer (market cap $13.3 billion) with more than 1,500 stores sporting the Bed Bath & Beyond, World Market, Cost Plus World Market, Christmas Tree Shops, Harmon and buybuy BABY store names. That number includes 50 stores opened just in the past year. The company is a steady grower, with just one of the past five years featuring double-digit growth. But customization of merchandise selections for regional climate and demographics have kept same-store sales on the rise. BBBY sports a P/E ratio of just 13 and the expectation is that BBBY should appreciate from its present perch below 58 to its minimum sell price of 89 within two years.
Footlocker (FL) has about 3,400 of its athletic footwear and apparel stores in malls across America and around the world operating under the names Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction and CCS. The company also has an active Direct-to-Customers division with an even wider product selection. The appeal of a company that sells carloads of Air Jordans is obvious, but what doesn’t show up in sales figures is that same-store sales have grown 10% in the past year. With a P/E of 14 and a forward annual dividend yield of 2.1%, Footlocker looks like a good bet to ride its trend to its minimum sell price of 42 within its two-year time limit.
GameStop (GME) and its nearly 6,700 stores are probably familiar to everyone who has anything to do with video games. But the company has branched out into sales of pre-owned smartphones and tablets and other pre-owned gaming gear. GameStop gets huge cash flow when new games like Black Ops II come out, and also scores big when a new game console like the Nintendo Wii U hits the market. The company has gone through three years of minimal revenue growth and is closing 200 stores. But it’s also opening a chain of new outlets aimed specifically at younger gamers that will feature toys, action figures and accessories along with the usual games. With a P/E of just 9, there’s a lot of value in GME, and the generous 3.9% annual dividend is attractive. And, for what it’s worth, the recent price gains in GME have made it a pick on the growth side as well.
Men’s Wearhouse (MW) sells all kinds of brand name and private label men’s clothing and accessories in its string of 1,240 stores and a couple of websites, with a small sideline in dry cleaning and uniform and work-wear sales. A recovering economy has allowed the company to book two years of double-digit revenue growth. The company’s wide selection of big and tall garments is also helping sales. The company has a clean balance sheet, with no debt and its estimated forward 12-month P/E ratio is just 10.8. MW is trading well below its maximum buy price of 35.3 and that (plus its 2.2% annual dividend yield) makes it a nice bargain.
All of these stocks, both growth and value, will stand to gain if the holiday sales season is a strong one.
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Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Bad Decisions Make Good Stories
Tim’s Comment: This sentiment, which has become popular recently, recognizes at least the entertainment value of bad decisions. Veteran investors know that the greater value of failure lies in the learning that comes from these events. We learn from our mistakes.
Paul’s Comment: It can be a real treat to sit around with a group of investing veterans and listen to their tales of fortunes won and lost. The painful stories are indeed often the best. But I always think: Anyone can learn from their own mistakes; but it takes a smart person to learn from someone else’s mistakes.
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 11/19/12—Thinking Big
Cabot’s growth guru Mike Cintolo, editor of Cabot Market Letter and Cabot Top Ten Trader, writes in this issue about the importance of aiming high with your growth investments, giving stocks the time to generate really big gains. He also stares skeptically over the Fiscal Cliff. Stock discussed: Facebook (FB).
Cabot Wealth Advisory 11/20/12—Volatility and the Stock Market
In this issue, Robin Carpenter, editor of Cabot ETF Investing System, delves into the VIX volatility measure and finds that volatility is on the borderline between low and high, hinting that further market weakness is unlikely.
Cabot Wealth Advisory 11/22/12—Food For Thought
Roy Ward of Cabot Benjamin Graham Value Letter writes about his earliest Thanksgiving memories and his love of value investing and recommends a couple of strong food stocks. Stocks discussed: Ingles Markets (IMKTA), Kroger (KR).
Have a great weekend,
Paul Goodwin
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report
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