Investors Should Consider Stage Stores on Future Stock Weakness

Includes: AEO, ARO, BIG, BJ, DLTR, SSI
by: NakedValue

Earlier this month, Stage Stores' (NYSE:SSI) stock rallied sharply following strong earnings and an announcement that the company authorized a $200 million shareholder buyback program. In our March 8, 2011, article, Add This Retail Play to Your Watchlist, we wrote that "investors would benefit by tempering their bullishness and waiting for the excitement to fade before establishing their positions." The stock closed at $18.37 on March 8th and traded as high as $19.95 in the days following the announcement.

Today, the stock traded below the March 8th closing price. At $17.30, the company has a projected forward P/E of 15.45 based on the average of the company's 2011 earnings forecast. Excluding current cash on the balance sheet, the company's forward P/E would be about 13.50. This may be a good entry point for the stock, but investors will likely be rewarded for additional patience. While others are bullish of Stage Stores at these levels (Zack Rank Buy), we still think the retail industry is loaded with cheap stocks with potential catalysts. Despite Stage Stores' growth potential and management commitment to shareholder value, investors should demand more margin of safety.

Investors interested in Stage Stores should also look at Aeropostale (NYSE:ARO), American Eagle (NYSE:AEO), Big Lots (NYSE:BIG), BJ's Wholesale Club (NYSE:BJ) and Dollar Tree (NASDAQ:DLTR). Each of these stocks have been mentioned to varying degrees as possible buyout candidates.

Disclosure: I am long BIG.