There is only one retail company on January’s Most Attractive Stocks list: Kirkland’s Inc. (NASDAQ:KIRK). KIRK is also one of the best performing stocks in the S&P 1500 since the Lehman bankruptcy. Given our value focus, it is rare that high-flying performers like KIRK make the Most Attractive Stocks list.
KIRK is rare for other reasons, too. Compared to competitors like Bed Bath and Beyond (NASDAQ:BBBY), Target (NYSE:TGT), and Macy’s (NYSE:M), KIRK is much more profitable and is the only firm with a top-quintile return on invested capital (ROIC) of 17.3%. Few retailers in the history of our database have ever achieved such high returns on invested capital.
As most of our readers know, a high ROIC alone will not get a stock on our Most Attractive Stocks list. The valuation of the stock must be very cheap as well. And KIRK fits the bill nicely with a price-to-economic book value ratio of 0.5, which means the current stock price ($13.25) implies the company’s profits will permanently decline by 50%. In other words, the valuation not only implies no future growth, it implies a perpetual 50% reduction in profits. Market expectations are setting the future-profit-growth bar quite low for this stock.
The company’s economic earnings are growing at a faster rate (+1,538%) than reported accounting earnings (+272%). Also, during the last fiscal year, KIRK generated $32.2mm in free cash flow, which represents 12.4% of the company’s enterprise value.
KIRK gets our “very attractive” stock rating because the business is throwing off a lot of cash, showing strong growth in profits while its valuation implies profits will decline permanently by 50%.
KIRK fits the risk/reward profile of a great stock to buy. It increased net operating profit after tax (NOPAT) on meager revenue growth and increased its NOPAT margin from 6.3% to 9.7%. KIRK’s ROIC rose from 9.9% to 17.3%. KIRK’s invested capital grew more slowly than revenues, so invested capital turns rose from 1.57x to 1.59x during the last fiscal year.