One of the sectors that has been hit on concern about slowing economic growth is retail. Two retailers I like have hit lows not seen since the depths of a financial crisis, have dirt cheap valuations, great dividend yields for retailing stocks and currently inspire extremely negative sentiment. Any pickup in growth or the tiniest bit of good news could significantly push their stocks higher.
American Eagle Outfitters (AEO) operates as an apparel and accessories retailer in the United States and Canada. The company offers denim wear, sweaters, graphic T-shirts, fleece, outerwear, and accessories under the American Eagle Outfitters brand name targeting 15-to-25-year-old men and women; clothing and accessories for kids ages 2 to 10 online under the 77kids by American Eagle brand name; and for babies under the brand name little77.
American Eagle’s stock has dropped 30% in the last nine months and looks like a huge long term bargain at these price levels. Reasons to like AEO at under $12 include that it's selling near the bottom of its five-year valuation range based on P/E, P/B, P/S and P/CF. American Eagle has a fortress balance sheet with over $3 a share in net cash on the books. It has one of best dividend yields among retailers at 3.9%. AEO has raised its dividend an average of 7.5% annually over the past five years. American Eagle sports a very low valuation of under 10 times earnings once you adjust for net cash. Insiders have purchased some 600,000 shares over the last year at higher price levels and AEO would make an ideal LBO candidate or merger target for a larger retailer. American Eagle is under many analysts’ price targets. S&P has a $18 price target on American Eagle. Piper Jaffray and UBS have $14 price targets on AEO.
Best Buy (BBY) operates as a retailer of consumer electronics, home office products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. The company’s stores offer video products, including televisions, navigation products, digital cameras and accessories, digital camcorders and accessories, e-readers, and DVD and Blu-ray players; and audio products, such as MP3 players and accessories, home theater audio systems and components, musical instruments, and mobile electronics comprising car stereo and satellite radio products.
Best Buy has lost over 40% of its stock market value over the last nine months. At these valuations it looks like a strong buy for the patient investor. Reasons to recommend BBY at $25 include that it's selling at the very bottom of its five-year valuation range based on P/E, P/B, P/S and P/CF. BBY has a solid balance sheet with net cash on the books. It generates robust cash flow that it uses to buy back stock and increase its dividend payments. Its yield is currently 2.7% and has raised its dividend an average of over 8% annually over the past five years. Best Buy is dirt cheap at just over seven times this year’s expected earnings and it has beat earnings significantly three of the last four quarters. Insiders are holding onto their shares and there has been some insider buying in the last month. A movement to tax internet sales is gaining momentum and could substantially level the playing field for BestBuy.com against the likes of Amazon (AMZN). Best Buy is way under many analysts’ price targets. Both Credit Suisse and S&P have $36 price targets on Best Buy.
Disclosure: I am long AEO and may pick up BBY in the next 72 hours as well.