My Top Specialty Retail Stocks For 2015

|
Includes: AAP, ABG, AN, AZO, CATO, CONN, CRMT, FINL, FIVE, FL, GME, GPI, HD, HZO, KMX, LAD, LB, LL, LOW, ORLY, PAG, ROST, SAH, TIF, WINA, ZUMZ
by: Stan Stafford

Summary

In this series of articles, I will be reviewing individual industry sectors and selecting my favorite stock picks for 2015.

For Part 49, I will be reviewing the Specialty Retail sector, taking a look at revenue/earnings growth and the overall financial stability of the companies.

Out of this group of stocks, I like America's Car-Mart and Finish Line, but Penske Automotive Group is my top pick.

Overview

In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2015. In Part 1, I reviewed 47 stocks within the Aerospace and Defense industry sector. For part 49, in determining my favorite stocks in this sector for 2015, I will review the following Specialty Retail stocks:

  • Aaron's (NYSE:AAN)
  • Abercrombie & Fitch (NYSE:ANF)
  • Advanced Auto Parts (NYSE:AAP)
  • Aeropostale (NYSE:ARO)
  • America's Car-Mart (NASDAQ:CRMT)
  • American Eagle Outfitters (NYSE:AEO)
  • Asbury Automotive Group (NYSE:ABG)
  • Ascena Retail Group (NASDAQ:ASNA)
  • AutoChina International (AUTCF)
  • Autonation (NYSE:AN)
  • Autozone (NYSE:AZO)
  • Barnes & Noble (NYSE:BKS)
  • Bebe Stores (NASDAQ:BEBE)
  • Bed Bath & Beyond (NASDAQ:BBBY)
  • Best Buy (NYSE:BBY)
  • Big 5 Sporting Goods (NASDAQ:BGFV)
  • Buckle (NYSE:BKE)
  • Build-A-Bear Workshop (NYSE:BBW)
  • Cabela's (NYSE:CAB)
  • CarMax (NYSE:KMX)
  • Cato (NYSE:CATO)
  • Chico's FAS (NYSE:CHS)
  • Children's Place (NASDAQ:PLCE)
  • Christopher & Banks (NYSE:CBK)
  • Citi Trends (NASDAQ:CTRN)
  • Conn's (NASDAQ:CONN)
  • CST Brands (NYSE:CST)
  • Destination Maternity (NASDAQ:DEST)
  • Destination XL Group (NASDAQ:DXLG)
  • Dick's Sporting Goods (NYSE:DKS)
  • DSW (NYSE:DSW)
  • Express (NYSE:EXPR)
  • Finish Line (NASDAQ:FINL)
  • Five Below (NASDAQ:FIVE)
  • Foot Locker (NYSE:FL)
  • GameStop (NYSE:GME)
  • Gap (NYSE:GPS)
  • Genesco (NYSE:GCO)
  • GNC Holdings (NYSE:GNC)
  • Group 1 Automotive (NYSE:GPI)
  • Guess (NYSE:GES)
  • Haverty (NYSE:HVT)
  • Hibbett Sports (NASDAQ:HIBB)
  • Home Depot (NYSE:HD)
  • Kirkland's (NASDAQ:KIRK)
  • L Brands (NYSE:LB)
  • Lithia Motors (NYSE:LAD)
  • Lowe's (NYSE:LOW)
  • Lumber Liquidators (NYSE:LL)
  • MarineMax (NYSE:HZO)
  • Mattress Firm Holding (NASDAQ:MFRM)
  • Men's Warehouse (MW)
  • Monro Muffler Brake (NASDAQ:MNRO)
  • Murphy (NYSE:MUSA)
  • New York & Company (NYSE:NWY)
  • O'Reilly Automotive (NASDAQ:ORLY)
  • Office Depot (NYSE:ODP)
  • Outerwall (NASDAQ:OUTR)
  • Penske Automotive Group (NYSE:PAG)
  • Pep Boys-Manny Moe (PBY)
  • Pier 1 Imports (NYSE:PIR)
  • Rent-A-Center (NASDAQ:RCII)
  • Restoration Hardware (NYSE:RH)
  • Ross Stores (NASDAQ:ROST)
  • Sally Beauty Holdings (NYSE:SBH)
  • Sears Hometown & Outlet (NASDAQ:SHOS)
  • Select Comfort (SCSS)
  • Shoe Carnival (NASDAQ:SCVL)
  • Signet Jewelers (NYSE:SIG)
  • Sonic Automotive (NYSE:SAH)
  • Stage Stores (NYSE:SSI)
  • Staples (NASDAQ:SPLS)
  • Stein Mart (NASDAQ:SMRT)
  • Systemax (NYSE:SYX)
  • Tiffany (NYSE:TIF)
  • Tile Shop Holdings (NASDAQ:TTS)
  • Tilly's (NYSE:TLYS)
  • TJX Companies (NYSE:TJX)
  • Tractor Supply (NASDAQ:TSCO)
  • Trans World Entertainment (NASDAQ:TWMC)
  • TravelCenters of America (NYSEMKT:TA)
  • Ulta Salon Cosmetics (NASDAQ:ULTA)
  • Urban Outfitters (NASDAQ:URBN)
  • Vitamin Shoppe (NYSE:VSI)
  • West Marine (NASDAQ:WMAR)
  • Williams-Sonoma (NYSE:WSM)
  • Winmark (NASDAQ:WINA)
  • Zumiez (NASDAQ:ZUMZ)

Step 1

The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed the following stocks from further review because of their negative earnings growth over the past five years:

  • Aaron's
  • Abercrombie & Fitch
  • Aeropostale
  • American Eagle Outfitters
  • Ascena Retail Group
  • AutoChina International
  • Barnes & Noble
  • Bebe Stores
  • Best Buy
  • Big 5 Sporting Goods
  • Chico's FAS
  • Children's Place
  • Citi Trends
  • CST Brands
  • Destination Maternity
  • Destination XL Group
  • Express
  • Guess
  • Haverty
  • Kirkland's
  • Men's Wearhouse
  • New York & Company
  • Office Depot
  • Pep Boys - Manny Moe
  • Pier 1 Imports
  • Rent-A-Center
  • Restoration Hardware
  • Sears Hometown & Outlet
  • Select Comfort
  • Staples
  • Stein Mart
  • Systemax
  • Tile Shop Holdings
  • Tilly's
  • West Marine

Step 2

I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat (less than 3%) growth or saw a decline in revenue over the past two years. These stocks include:

  • Buckle
  • Build-A-Bear Workshop
  • Christopher & Banks
  • Gap
  • Murphy
  • Stage Stores
  • Trans World Entertainment
  • TravelCenters of America

Step 3

My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 2 to focus more specifically on fairly valued/undervalued stocks. These stocks included:

  • Bed Bath & Beyond
  • Cabela's
  • Dick's Sporting Goods
  • DSW
  • Genesco
  • GNC Holdings
  • Hibbett Sports
  • Mattress Firm Holding
  • Monro Muffler Brake
  • Sally Beauty Holdings
  • Shoe Carnival
  • Signet Jewelers
  • TJX Companies
  • Tractor Supply
  • Urban Outfitters
  • Vitamin Shoppe
  • Williams-Sonoma

Step 4

The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.

Fundamental Score Value Score
Advanced Auto Parts 10 8
America's Car-Mart 10 9
Asbury Automotive Group 7 6
AutoNation 9 7
AutoZone 6 3
CarMax 9 6
Cato 10 8
Conn's 9 8
Finish Line 10 10
Five Below 7 10
Foot Locker 10 6
GameStop 9 9
Group 1 Automotive 8 5
Home Depot 9 5
L Brands 8 7
Lithia Motors 7 8
Lowe's Companies 9 5
Lumber Liquidators 9 10
MarineMax 4 5
O'Reilly Automotive 9 2
Penske Automotive Group 8 9
Ross Stores 10 4
Sonic Automotive 6 9
Tiffany 10 10
Winmark 9 2
Zumiez 9 6

To determine the best stocks for 2015, I'm only taking into consideration stocks that have values of 8 or higher for both fundamental and value scores. Doing this left me with the following remaining stocks:

  • Advanced Auto Parts
  • America's Car-Mart
  • Cato
  • Conn's
  • Finish Line
  • GameStop
  • Lumber Liquidators
  • Penske Automotive Group
  • Tiffany

Step 5

My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. The only stock to have seen a decrease in book value during this time period is GameStop.

Step 6

I then looked at the remaining stocks and only included stocks with earnings yields of 6% or higher in my final analysis. These stocks include:

  • America's Car-Mart
  • Finish Line
  • Lumber Liquidators
  • Penske Automotive Group

Step 7

My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2015. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.

America's Car-Mart

For its last quarter, the company posted a 12% increase in revenue and an increase in earnings per share from $0.68 to $0.81 compared to the same period last year. The company's same store sales grew by 7.5% and retail unit sales increased by 10.7%.

With an increased number of locations, improved production, and significant share repurchases, the company appears poised to continue rewarding shareholders with significant growth moving forward.

Finish Line

For its last quarter, the company posted a 6% increase in revenue and earnings per share that were on par with the same period last year. The company's same store sales grew by 2.6% for the quarter. The company continues to maintain a strong balance sheet with virtually no debt and maintains a continuing share repurchase plan.

With record customer traffic, improving margins, and a strong focus on an improving product mix, I feel that Finish Line will perform well in its each of its three business segments. I believe that the company's product pipeline will keep same stores sales growing in upcoming quarters.

Lumber Liquidators

In its last quarter, the company posted a 4% increase in revenue compared to the same period last year and an earnings loss of $0.29 per share. Things are not going well for the company as it has dealt with several problems/issues (EPA, loss of CEO, etc.) and the recent quarterly results did not help.

With a negative bottom line and decreasing same store sales numbers, Lumber Liquidators is a stock I would avoid at the moment. While the stock's price has dropped drastically over the past few months and may look attractive, I have not seen any evidence that a turnaround in the near term is very likely. Value investors may want to keep any eye on the stock as a lower drop in price may warrant further consideration, but as of now, I cannot recommend the stock for any kind of significant price appreciation this year, unless the company is bought out, which I don't think is likely to happen, at least not, in the short term.

Penske Automotive Group

For its last quarter, the company posted a 10% increase in revenue and a 15% increase in earnings per share compared to the same period last year. The company's same store sales numbers increased by 4.6% and its total retail unit sales increased by 6.7%.

In the quarter, the company made to significant acquisitions of commercial truck dealerships and also acquired a Land Rover retail automotive dealership. With a strong history of growing revenue and earnings, I feel that Penske is poised to continue rewarding investors as it maintains a solid share repurchase program and a low yield, steady growing dividend.

Conclusion

Out of the final four remaining stocks, Lumber Liquidators is the only one I do not currently like, but Penske Automotive Group is my top choice. Looking at the charts below, you can see that it has outperformed the other two stocks in terms of revenue growth, earnings growth, and price appreciation over the past five years.

PAG Revenue (<a href=

PAG Revenue (NYSE:TTM) data by YCharts

PAG EPS Basic Chart

PAG EPS Basic (TTM) data by YCharts

PAG Chart

PAG data by YCharts

Even though Penske continues seeing significant price appreciation it continues to trade at an attractive valuation and I love the fact it has continuously raised its dividend since 2011 not on a yearly basis, but on a quarterly basis, seeing its quarterly dividend rise from $0.07 to $0.23 during that stretch. I feel that the stock will be a winner both in the short and long term, which is why I view it as a top pick for 2015.

For part fifty of this series, I will be reviewing the Technology Hardware industry sector. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.