Six Cheap Retail Stocks To Consider

We're approaching the end of the 3rd quarter for 2007, and what an eventful quarter it was. But you won't see that by looking at the end result in the broad market indexes. The S&P 500 is up ~2% for the quarter. That masks the atrocious performance of anything related to housing or the consumer. Homebuilders had a horrible quarter and are now trading at their approximate book value, even after those book values have take mark-downs.

You have some household retail names - Home Depot (HD), Lowe's (LOW), Foot Locker (FL), Timberland (TBL), Circuit City (CC), Pac Sun (PSUN), just to name a few - trading at very cheap multiples. HD, for example, is now trading at around 9-11x its net earnings, assuming slightly higher margins than they'll earn in this cyclically down year, but still lower margins than they've earned in their good years.

Many companies are basically trading as if 1) They won't grow profitably over time and 2) They'll never be able to earn an adequate margin on their sales. While no one wants to talk about these companies in the analyst community, let alone invest in them, individuals should be taking advantage of the fire sale prices and loading up their portfolio with solid companies that are well financed and have good long term prospects. HD, LOW, and FL come to mind just given either their huge competitive advantages (HD, LOW) or pristine balance sheets in a very mature market (FL).

I recently heard a speech by Marty Whitman (for more on him, check out my premium log in coming weeks) of Third Avenue fame, in which he said that the only reason he could buy his companies at substantial discounts to what they're worth is that usually, their near-term earnings outlook "sucks."

Well-said. Individual investors should take heed and act on such sage advice.

Disclosure: Author is long HD and FL

Comments

[Ceviche Fund Partners LP/Dan Jacome]

A whopping percentage of HD's value is driven by growth options the firm has at its disposal, problem is: mgmt isn't executing...

I'd shy away from HD and roll into a retailer with legs. We like: FAST as the best bet on a space that is getting hammered, namely, retail/wholesale bldg products.....