Ever since the Great Recession rocked North America, a large cloud has been hovering over the retail sector. Amid fears that the consumer is tapped out, many analysts have been predicting a bleak future for retail companies – and their stocks.
But since the recession ended, retailers have been proving the doubters wrong. In the United States, retail and food service sales are 7.7-per-cent higher than they were a year ago, and more than 16 per cent above their March, 2009, low. That surprising resilience, coupled with lingering fears about the sector, have made for some exceptional valuations among retail firms and their stocks.
Opportunistic companies are taking advantage of the cheap prices. This past week, shoe and clothing retailer Timberland was bought out by a larger apparel firm, VF Corp., in a multibillion-dollar deal. Earlier this spring, private-equity firm PPR purchased clothing retailer Volcom. Back in March, shareholders approved the buyout of J. Crew by two private-equity companies. Numerous other firms – from high-end retailers like Tiffany to big-box discounters like BJ's Wholesale – have been the subject of takeover rumours in recent weeks.
My Guru Strategies, each of which is based on the approach of a different investing great, are finding several bargains among retail stocks. Many of these firms are small-caps or smaller mid-caps, and their smaller sizes could make them interesting takeover targets.
Even if they aren't bought out, several of these firms look like intriguing purchases for long-term investors. Here are some of the bargains that my screens are pointing to:
Big Lots, Inc. : This Ohio-based retailer offers a variety of discounted merchandise, ranging from food to home goods to furniture. It has received takeover bids from private equity firms, but last month decided not to sell – for now, at least.
The stock elicits strong interest from the Guru model that I base on the writings of mutual fund legend Peter Lynch. It considers the stock a “fast-grower” – Mr. Lynch's favourite type of investment – because of its excellent 45.3-per-cent long-term earnings-per-share growth rate.
One of Mr. Lynch’s favourite ways to prospect for promising growth stocks was to take a stock’s price-to-earnings (P/E) ratio, and divide it by the growth rate of earnings to derive what he called the PEG ratio. When we divide Big Lots' 11.3 P/E ratio by its growth rate, we get a PEG of just 0.25. That falls into the Lynch model's best-case category.
GameStop Corp. : As the world's largest video game and entertainment software retailer, this Texas-based firm has attracted a lot of short interest – and takeover rumours – as some have questioned whether its store-based model can survive in a retail world that is more and more about online sales.
The concerns have held down shares of a company that has proven it can grow through a variety of climates. Its attractive valuation is a big reason GameStop gets strong interest from my Joel Greenblatt-based model, which likes the stock's 20.2-per-cent earnings yield, as well as its 62.2-per-cent return on capital.
Dollar Tree, Inc. : This Virginia-based company sells food, household goods, toys, and more – all at the price of $1 (U.S.) It actually increased sales and earnings throughout the Great Recession, and has continued to do so since the recession ended.
My James O'Shaughnessy-based growth model likes Dollar Tree. Mr. O'Shaughnessy looks for a key combination of characteristics in growth stocks: strong relative strength (a sign the market is embracing the stock) and a low price/sales ratio (a sign it hasn't gotten overpriced). Dollar Tree sports an 84 RS and a 1.27 P/S ratio, impressive on both fronts.
RadioShack Corp. : This Texas-based electronics store chain is another firm that has been the subject of takeover rumours. And it's also another favourite of my Lynch-based model.
Its growth has been moderate over the long-term (10.1 per cent a year), but its dirt-cheap 7.9 P/E ratio and 1.9-per-cent dividend yield make for a yield-adjusted PEG of 0.66, indicating it’s a bargain.
Rona Inc. : This 72-year-old Quebec-based business is Canada's largest distributor and retailer of hardware, renovation and gardening products, operating a network of almost 700 stores.
It had a rough first quarter, but much of that seems to have been attributable to bad weather, not long-term issues. The beaten-down value play gets high marks from the model that I base on the writings of Benjamin Graham, the man known as the father of value investing.
His conservative approach likes Rona's 2.62 current ratio, and the fact that its long-term debt ($433-million Canadian) is less than the value of its net current assets ($940-million). It also likes the price: Rona shares trade for about 13 times trailing 12-month earnings and a mere 0.84 times book value.
Disclosure: I'm long GameStop and Dollar Tree.