Four Picks in a Retail Slowdown

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

INTERVIEW: Hard Times Ahead at the Mall by Sandra Ward

Summary: Barron's interviews Shawn Kravetz, who runs Esplanade Capital, which has earned 16.6% after fees over the last five years. Key points:

• Normally a retail bull, Shawn's underexposed to the sector because he foresees a slowdown in consumer spending if interest rates rise and people spend their spare cash to keep a roof over their heads. He likes Tween Brands Inc. (TWB), which does business under two names: Limited Too is "the most unheralded specialty-retailer growth story out there." Square footage will rise by 5% over the next couple years, and operating profits are 20%. Its smaller brother, Justice, has only 184 stores to Limited's 570, but it's opening another 100 this year, and will contribute 1/3 of earnings by 2008. Shares ($41) should climb towards $54-60.
• Solar is a huge growth area, up 50% in 2006 and likely another 50% in 2007. Evergreen Solar's (ESLR) String Ribbon technology allows solar manufacturers to use less silicon (of which there is a severe shortage), giving it a 20% cost advantage. As earnings grow, shares ($8) could hit $15-25 on increased earnings, share buybacks, and a possible buyout.
• Investors are focused on PayPal's (owned by eBay Inc. (EBAY)) web payments, and assume that Western Union's (WU) business is doomed. But many WU customers don't have web access, and margins on WU's business are stellar. At 17x 2008 earnings, the stock "is just too cheap."
• Amazon.com's (AMZN) current value is excessive; Kravetz is short the stock. To make it cheap, margins would have to triple, which is unlikely considering the ease of online price comparison.

Related Links: Cooling Off: Solar Stocks Feeling the Cramer Effect • Where is the Solar Industry Headed? • The Long Case for Western Union: Like Wiring Money Into Your Portfolio • Amazon: Time to Book Profits - Barron's • What's Driving Amazon's Stock Price?

Comments

[k_denninger]

I don't think any of the retailers are a good long play right now.

I agree with you on AMZN; the surge has been absolutely out-of-this-world and totally unsupportable based on growth estimates or fundamentals. I got burned on an option play on it a month back but am looking to go after it when the trend up breaks - and it may be in the process of doing so.

[Frank Li]

On Western Union versus Paypal: he's right that WU has a huge business among people who don't have internet access. But many people pick up money via Western Union in stores and other outlets. Wouldn't it be easy for them to get the money via PayPal, and for stores to accept payment? This is a business waiting to be made more efficient -- and that means WU's margins can't be sustainable.

[bobbyjoe]

WU has one big problem... they are losing their competitive advantage. You see this in their declining prices - simple as that. That means revenues are doomed to grow at less than the transaction growth rate. And because WU is so big it is reliant upon global industry trends. Do the math: declining prices in a slowing industry and WU's future isn't anywhere near as bright as it's past has been. There are better companies out there.

[Ralph F]

Look at the hit WU took when Verizon just now announced its payments via cell phone. WU is old, expensive technology. I'd never go long this stock.