Wednesday, December 12, 2012

Value in Retail

The significant rise in stock prices this year--on top of the sharp rebound over the past four years--has left few bargains.  There are, however, still some depressed stocks of good companies whose long-term prospects have become suspect.  Examples are Microsoft, Intel, and Kohl's.

Let's look today at the comparative value of Kohl's stock (symbol KSS).  The stock has recently dropped nearly 20% after the company reported disappointing sales results at its stores.  As a result, the stock has fallen 15% over the past year and 5% over the last five years.  The shares now sell for ten times current-year earnings, growth next year is forecast at 10%, and the company's return on equity is 17%.  Management has steadily repurchased shares, thereby increasing earnings per share and the scarcity of outstanding shares.  On the negative side, its earnings trends are comparatively poor, especially compared to those of peer TJX (parent of TJ Maxx and Marshall's).

But TJX stock is up 35% over the past year and 198% over the past five.  It clearly has earnings and price momentum, which is why it is so popular.  Earnings per share at TJX are forecast to rise 12% over the next year (not much more than Kohl's).  TJX shares seem pricey, at 17 times current-year earnings, versus only 10 at Kohl's.

For investors who pay attention to stock price charts, Kohl's has fallen to its current level of 43-44 several times over the past year and rebounded into the low to mid 50's each time.  I think there is a good chance that this will happen again.  Supported by a likely rise in the broad stock market, the prospect for a 25% gain in KSS seems like a good buy when shopping for stocks during this holiday season.

Steve Lehman

KSS:  43.35
TJX:  42.70

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