The sudden plunge in oil and other commodities could be a game-changer for companies that sell to strapped out U.S. consumers tired of facing rising prices. Stubbornly high all year, gasoline is a huge expenditure that is looking to be going down, perhaps freeing up some discretionary dollars.
While large-cap consumer stocks have caught a whiff of this and have begun trending higher (the sector is up 5% since August 8th, which preceded the FOMC meeting where the Fed suggested low rates for the next two years and was the closing low, while the S&P 500 is up just 1% and is down just 4% YTD compared to an almost 10% decline in the broad market), the market hasn't been exactly efficient, especially with smaller names.
I decided to screen the space for companies that sell to middle-income and lower-income customers that look to be cheap but also growing. Here are the parameters I used:
- Market Cap > $200mm
- YTD price < 3%
- EPS Growth Past year > 8%
- Trailing PE < 12
- Trailing EV/EBITDA < 7
- Expected 2012 EPS Growth > 0
14 companies made the cut (click to enlarge table):
A caveat: These aren't recommendations. I am totally unfamiliar with some of these companies. I use screens, such as this one, to identify candidates for further investigation.
I sorted the group on EV/EBITDA, so the cheaper ones by this metric are at the top. Looking at some overall metrics, the stocks vary in terms of balance sheet, with several strong ones (in terms of net debt to capital) highlighted in green, but a few more leveraged ones highlighted in red. They are typically down 15% YTD, so they are trailing the sector. From the 52-week high, they are typically down 26% (some have been cut almost in half). As expected (given the 12PE max), the typical PE is a discount to the market at 10.6X on a trailing basis. While analysts could be a bit too optimistic, they currently expect all of these companies to grow next year. I also included price to tangible book, highlighting several below 2X, offering potentially additional downside protection. Finally, note that several of the companies have double-digit return on capital, but a few are quite meager. I included a dividend column as well, for those interested in that measure.
Cato (NYSE:CATO), which caters to young women and is focused in the Southeast, is relatively new holding in my conservative growth/balanced model portfolio. The company seems to be pretty aggressive about returning capital. Recent results have been lackluster, with modest store growth offsetting marginal declines in same-store sales. This is one that fits the theme well in my view.
American Eagle (NYSE:AEO) fits the theme well too. The company has struggled on the top-line, with sales falling marginally over the past year as margins have increased. Insiders own 9% of the company, and it has been rumored as an acquisition target this year. With no debt and 22% of the market cap in cash, it's very inexpensive.
Gamestop (NYSE:GME) faces a lot of questions about its business model as games go digital rather than physical. This probably accounts for the 25% short-interest.
Shoe Carnival (NASDAQ:SCVL) looks extremely attractive at the current price. I follow it closely (first profiled it for Seeking Alpha readers in 2007 on the way down) and like that they are opening stores again at a measured pace. They also just launched an e-commerce initiative. There is tremendous insider ownership. Their customer will definitely appreciate falling gasoline prices.
As far as the rest of the list, Kohl's (NYSE:KSS), Ascena (NASDAQ:ASNA), which was Dress Barn but now is that plus Justice (and maurices), and Maidenform (NYSE:MFB) look most interesting. All three have good alignment with shareholders due to substantial insider holdings. I don't really know G-III (NASDAQ:GIII), but it looks interesting as well, especially considering how it has been slammed. I noticed a very large jump in inventory - perhaps that is the issue. Insiders own 17%. The company is primarily a wholesaler, and other falling input costs might benefit them as well.
So, while on-the-run consumer discretionary names seem to be capturing some attention as investors begin factor in falling gasoline prices, it seems like the broad selling in the market may have hit some of these retail-oriented companies a bit too hard. While I like CATO and SCVL, some of the other names have interesting attributes as well.
Disclosure: I am long CATO in a model at Invest By Model