5 Retail and Tech Stocks Worth a Look

by: Davy Bui

As pointed out earlier this week, I found one tech stock in particular, Cisco Systems (NASDAQ:CSCO), attractive enough to add to my portfolio. Let's take a look at the other new entrants to my stock watchlist, all coming from the tech or retail sectors:

  • Gap Inc. (NYSE:GPS)
  • Iron Mountain Inc. (NYSE:IRM)
  • Research In Motion Ltd. (RIMM)
  • RadioShack Corp. (NYSE:RSH)

Gap is a clothing retailer with a number of well-known brands, including Banana Republic, Old Navy, and of course Gap. Despite analyst grumbling about missteps with its various product lines, GPS looks to be the pick of this litter from a financial standpoint, starting with the stellar returns on equity near 27%, which looks even more impressive considering the company is debt-free. No debt means a rock-solid balance sheet and over $2 cash per share.

Free cash flow (FCF) has been fairly steady over the last five years, averaging $1.2B during a period spanning several years of recession and hunkered-down consumers. However, revenue has been trending down even as earnings and FCF have risen. This worrisome pattern suggests some caution in valuing Gap; I put a rough intrinsic value of $26 per share on it. At its current price near $23, the stock's slight discount does not warrant serious consideration, but I would look again if GPS fell to $18.

RadioShack is another retailer, selling electronic goods and accessories. RSH has been oft-mentioned as a possible buy-out candidate, so I took a quick look at the stock. The company has a reasonable debt load and respectable returns, but FCF has been trending down sharply in the last five years, with some big working capital adjustments in 2010. Without digging into the company's financial reports, it is impossible to ascertain whether RadioShack can reverse course, but it may be worth an in-depth look.

Famed value investor Mohnish Pabrai wrote in his first book that retail stocks were to be avoided. As such, we have two tech stocks added to the watchlist this week. From a quick survey standpoint, Iron Mountain may (or may not) have good growth potential, but the stock is priced as such, making it unattractive as an investment opportunity near its $32 share price.

Our last stock this week is an interesting case: Research In Motion. With all the accolades accorded to Apple (NASDAQ:AAPL) and its iPhone/iPad product line, perhaps the market has soured on rivals like RIM to the point where a one-time growth stock is now value. A PEG ratio of 0.45 certainly suggests this might be the case, and a balance sheet loaded with $2B cash and no debt looks good as well.

Unfortunately, the stock's price still outstrips the intrinsic value implied strictly by FCF. Based solely on FCF, I would value RIMM shares at $50, below where it's trading now. Keep in mind, these rough valuations give no credence to possible growth catalysts, but simply examine past cash flow in trying to determine a company's proven earning power. Throw in the competitive concerns as Apple continues to grow market share, and I am inclined to look elsewhere.

Readers can view the breakdown on these stocks in spreadsheet format here.

Disclosure: I am long CSCO.