Six Attractive and Six Unattractive Retail Stocks

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 |  Includes: ANF, AZO, BIG, JWN, LB, ODP, ROST, RSH, RTH, SWY, TIF, TJX, WFM, XRT
by: AFG Indexes

In yesterday’s article on ValueExpectations.com we discussed the solid month of February for the retail segment as most retailers posted better-than-expected same store sales growth. The question we posed was whether or not this was sustainable growth, or just a small temporary boost caused by easy comparisons and tax refunds.

The conclusion that we come to is that it is not the time to rush out and buy retail companies but to proceed with caution as the “easy money has likely been made in the retail sector.” However if you are an investor that is actively pursuing positions from within the retail industry, we have provided a few retail names that look attractive (6) and unattractive (6) based on criteria that The Applied Finance Group (AFG) uses in its stock selection process.

The companies listed below are rated as attractive/unattractive based on 3 main factors used in AFG’s portfolio construction process which include valuation, expected economic profitability* (Economic Margin is AFG’s measure of economic profitability), and AFG’s overall investment opportunity signal which takes into account the previous 2 criteria as well as earnings quality, model accuracy, management’s ability to create wealth for its shareholders among others.

All of the variables used in ranking these stocks have proven through time to identify the most/least likely companies to outperform their benchmarks and significant spreads are created when you break down the performance of the stocks in each decile rank of each variable.

AFG Rank within Sector
Ticker Name Investment Opportunity Valuation Signal EM Change Signal
Attractive Retail Companies
(NASDAQ:ROST) ROSS STORES INC Attractive Attractive Positive
(NYSE:TJX) TJX COMPANIES INC THE Attractive Attractive Positive
(NYSE:SWY) SAFEWAY INC Attractive Attractive Positive
(NYSE:BIG) BIG LOTS INC Attractive Attractive Positive
(NYSE:RSH) RADIOSHACK CORP Attractive Attractive Positive
(NYSE:AZO) AUTOZONE INC Attractive Attractive Positive
Unattractive Retail Companies
(NASDAQ:WFMI) WHOLE FOODS MARKET INC Unattractive Unattractive Negative
(NYSE:ODP) OFFICE DEPOT INC Unattractive Unattractive Negative
(NYSE:JWN) NORDSTROM INC Unattractive Unattractive Negative
(NYSE:ANF) ABERCROMBIE & FITCH CO Unattractive Unattractive Negative
(NYSE:TIF) TIFFANY & CO Unattractive Unattractive Negative
(NYSE:LTD) LIMITED BRANDS INC Unattractive Unattractive Negative
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Finally, as an additional layer of analysis, we can take a look at a couple of snapshots from AFG’s institutional research site, AFGView.com, to provide our readers additional insight into the valuation attractiveness and wealth creation strategy of a specific company using tools provided by AFG.

The example we have provided is Ross Stores, Inc. (NASDAQ:ROST) a company that currently looks undervalued according to AFG’s default valuation model. Historically, AFG has tracked Ross Stores, Inc. relatively well, as evident in its high accuracy score of 93. Also, Ross has a current AFG Value Score of 79, meaning the company ranks in the top 79th percentile of companies in the AFG universe in valuation attractiveness. Companies AFG identifies as undervalued have proven through back-tests to be more likely to outperform than those companies with an unattractive default AFG valuation rank.

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Also looking at Ross’s Wealth Creation Chart we can see that they have maintained positive EM levels (earning above its cost of capital) in the last 14 years and are expected to improve Economic Margins in the year ahead. The ideal strategy AFG likes to see management employ is to earn above its cost of capital as well as grow out its asset base in order to maximize NPV positive opportunities. As you can see in the chart below there has been a solid correlation with ROST’s EM levels and its return relative to the S&P 500, which is a very good sign being that ROST is expected to experience an improvement in EM levels next year.

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Disclosure: None