TJX

In yesterday’s article on ValueExpectations.com we discussed the solid month of February for the retail segment as most retailers posted better-than-expected same store sales growth. The question we posed was whether or not this was sustainable growth, or just a small temporary boost caused by easy comparisons and tax refunds. The conclusion that we come to is that it is not the time to rush out and buy retail companies but to proceed with caution as the “easy money has likely been made in the retail sector.” However if you are an investor that is actively pursuing positions from within the retail industry, we have provided a few retail names that look attractive (6) and unattractive (6) based on criteria that The Applied Finance Group uses in its stock selection process.

The month of February provided much optimism for the retail segment, as U.S. retailers posted their best monthly sales performance since just before the recession started in 2007. Three-quarters of the 28 retailers in the Thomson Reuters index beat expectations, with the index’s same store sales up 4% in February, compared with expectations for a 2.9% rise. It seems that people are not too busy tending to their budget to go out to splash $200 on a pair of jeans at Nordstrom (JWN), or a set of jewelry at Tiffany (TIF) to please the loved ones. After all, Valentine’s Day falls in the month of February. It seems, too, that teenagers did not want to be left behind with the spending spree, helping boost sales at Abercrombie & Fitch, American Eagle Outfitters and Aeropostale. While some were quick to point out a recovery in consumer spending, others were more cautious in assessing how much of a recovery has been priced in retail stocks. First, while the positive comps growth of most retailers is pleasing, it came as a result of easy comparisons, with the base period comps down 4.7%. Second, tax refund checks are either making its way to tax-payers’ mailboxes, or have already made its way to cash registers at the shopping malls. With refund checks being sent out as early as the end of January, it is safe to assume that some of these checks contribute to the comps growth. Therefore, the question that remains is, when comparison normalizes and tax refund fades, what is the sustainable growth for the country’s retailers?

With the biggest shopping season of the year just around the corner, we thought it would be timely to highlight some consumer sector companies that look attractive according to The Applied Finance Group’s (AFG’s) criteria for investment opportunity attractiveness, as they are in line to benefit from the upcoming seasonal spending patterns. The list of companies we have provided look the most attractive within the AFG consumer sector in terms of valuation attractiveness, economic performance, and overall investment attractiveness relative to their peers.

One of the companies that we feel particularly confident in is the retailer Kohl’s (KSS) which is currently a holding in The AFG 50, (a model portfolio of 50 large cap stocks designed to help Portfolio Managers save time, make more informed investment decisions, and outperform their benchmark). We are confident about Kohl’s competitiveness because they have a strong cash flow, strong execution, and have been outperforming their competition.

Going into this holiday season, consumers will most likely remain thrifty due to the overriding economic conditions, although their confidence levels have improved so far this year. They will search hard for values, being mindful of budget. We continue to believe Kohl’s will remain one of the most successful retailers in this country, as it strives to and succeeds in providing value to consumers with freshness and relevance of its merchandize.

The complete list of consumer stocks we have provided below, which includes the highlighted Kohl’s, are the companies AFG believes are the most likely to outperform. Companies that AFG identifies as having an attractive valuation, improving Economic Margins (AFG’s corporate performance metric) and an attractive investment opportunity signal have proven over time to outperform those companies with unattractive valuations, declining Economic Margins, and unattractive investment opportunity signal.

AFG Ticker Name AFG Sector Investment Opportunity 12 Attractive Consumer Companies (S&P 500) (NYSE:ARO) AEROPOSTALE INC Consumer Services Attractive (NASDAQ:ROST) ROSS STORES INC Consumer Services Attractive (NYSE:TJX) TJX COMPANIES INC THE Consumer Services Attractive (NASDAQ:DLTR) DOLLAR TREE INC Consumer Services Attractive (NYSE:KSS) KOHL'S CORP Consumer Services Attractive (NYSE:FDO) FAMILY DOLLAR STORES INC Consumer Services Attractive (NYSE:BIG) BIG LOTS INC Consumer Services Attractive (NYSE:GPS) GAP INC THE Consumer Services Attractive (NYSE:GME)  GAMESTOP CORP CL A Consumer Services Attractive (NYSE:WMT)  WAL-MART STORES INC Consumer Services Attractive (NYSE:BBY)  BEST BUY CO INC Consumer Services Attractive (NYSE:COH) COACH INC Consumer Non Durable Attractive

Source: EconomicMargin.com

AFG's Valuation Metric – Measures the percent to target (deviation between a stock’s current trading price and its AFG current default target price). To derive the intrinsic value of a firm, AFG uses its proprietary Valuation Model (modified discounted cash flow model).

Economic Margin - A corporate performance measurement that addresses the gaps in GAAP, eliminating distortions caused by accounting policies to measure what a company is truly earning above or below their cost of capital.

Management Quality – Assesses management’s ability to make wealth creating decisions.

 

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The Consumer Confidence Index jumped higher in August than was expected and is at its highest point since the current recession began. The Consumer Confidence Index rose to 51.4 which beat expectations yet is still way below 90, the minimum level to indicate a healthy economy, but the confidence level is headed in the right direction. Being that consumers seem to be gaining confidence in an economic recovery, some consumer stocks may be returning to the forefront of some investor’s minds so we decided to put together a list of attractive consumer companies from the S&P 500.

All of the companies listed have an attractive valuation and are expected to improve their Economic Margins at a greater rate than their sector peers. All of these companies are also rated as attractive according to AFG’s default investment criteria which factors in valuation, economic performance and management quality.

Exchange/Ticker     AFG Rank within Sector Name Sector Investment Opportunity Valuation Signal EM Change Signal Attractive Consumer Services Companies - S&P 500 (NYSE: DRI) DARDEN RESTAURANTS Consumer Services Attractive Attractive Positive (NYSE: KR) KROGER CO THE Consumer Services Attractive Attractive Positive (NYSE: TJX) TJX COMPANIES INC THE Consumer Services Attractive Attractive Positive (NYSE: MCD) MCDONALD'S CORP Consumer Services Attractive Attractive Positive (NYSE: YUM) YUM! BRANDS INC Consumer Services Attractive Attractive Positive (NYSE: CVS) CVS CAREMARK CORP Consumer Services Attractive Attractive Positive (NYSE: FDO) FAMILY DOLLAR STORES INC Consumer Services Attractive Attractive Positive (NYSE: BIG) BIG LOTS INC Consumer Services Attractive Attractive Positive (NYSE: RSH) RADIOSHACK CORP Consumer Services Attractive Fair Positive (NYSE: WMT) WAL-MART STORES INC Consumer Services Attractive Attractive Positive

AFG's Valuation Metric – Measures the percent to target (deviation between a stock’s current trading price and its AFG current default target price). To derive the intrinsic value of a firm, AFG uses its proprietary Valuation Model (modified discounted cash flow model).

Economic Margin - A corporate performance measurement that addresses the gaps in GAAP, eliminating distortions caused by accounting policies to measure what a company is truly earning above or below their cost of capital.

Management Quality – Assesses management’s ability to make wealth creating decisions.

 

Bloomberg provides a score for companies within the S&P 500 based on an average of all analyst ratings from the street. Below is a table highlighting companies with the best analyst ratings, largest increase in rating, highest price targets, and worst analyst ratings and the valuation attractiveness of each of these companies based on The Applied Finance Group’s (AFG) valuation model.

Companies within each of these groups are ranked from most attractive from a valuation perspective to the least attractive. VE.com will actively track the performance of these recommendations and see how they stack up to the analyst recommendations in each group. AFGview.com, AFG’s professional investor website allows you to compare any company using their rating versus the consensus ratings of the sell side. If you are interested in an analysis on a specific company, contact afgsales@afgltd.com.

 

Best/Worst Analyst Rated Companies (Bloomberg)

 

AFG's Valuation Model – Using AFG’s modified discounted cash flow model to measure the intrinsic value of a firm compared to its peers. AFG's Value Score - A score which represents the ranked percent to target (deviation between stock’s current trading price and AFG’s current default target price) or attractiveness (upside) relative to the universe. A Value Score of 100 is the most undervalued and 0 is the most overvalued company in the universe.

After reading a few articles highlighting attractive retail/apparel stocks, we have decided to analyze the companies mentioned in these two articles based on their attractiveness from a valuation standpoint using AFG’s valuation model.  We have examined the expectations for sales growth embedded in their current prices using AFG’s Value Expectation interface, as well as provided four companies that we find attractive in this retail/apparel space. The first four companies listed in the table are from an article in MSN Money by Catherine Holahan that mentions companies thriving in the recession (performed well in March), The second four are from an article from The Curious Investor (SeekingAlpha.com) that give the author's picks for companies ready to take advantage of a retail revival when consumer spending returns to a more normal level. The final four stocks are companies that we find the most attractive in the retail/apparel space.

When analyzing the sales expectations for these companies, measuring the spread between a company’s VE sales growth expectations and what it has historically delivered will give you a good idea of which companies have the best chance of meeting or exceeding those expectations, and thus are more likely to outperform.

 Retail/Apparel Companies

 

*AFG’s Value Expectation allows us to understand the imbedded Sales Growth, EBITDA Margins, and Asset Turnovers a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future sales growth of companies assuming their EBITDA margins and Asset turnovers stay at the 5 year median levels.