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Inside Wall Street

Where to Dress for a Recovery

U.S. retailers have been whipsawed by the dire economy and crimped consumer spending, so should investors just dump the idea of investing in this sector? Not at all. Despite retail's woes, some segments offer a glimmer of hope. Analysts say specialty retailers, including those catering to teens or women, may be the group to focus on since they tend to rally quickly after signs of economic improvement.

"Brighter days are ahead for the [special lines] group," says Susan Ferrara of Value Line (VALU). In an industry report, she says specialty retailing "offers a plethora of choices that would be suitable for portfolios with a buy-and-hold strategy" over a three-to-five-year time frame.

"I couldn't agree more," says Ann Poole, senior analyst at investment bank Stephens, who covers specialty retailers such as American Eagle Outfitters (AEO) and Chico's (CHS), which top her buy list. Eagle and Chico's have "gotten their act together in terms of improved new products, productivity, and lower costs," she notes. These positives aren't yet reflected in their stocks, she adds.

American Eagle is among the largest specialty retailers of men and women's casual apparel and footwear for teens and young adults between 15 and 25. It is "one of the most compelling growth opportunities in the teen space," says Poole. Eagle deserves a richer valuation, she adds, because of its strong brand and solid balance sheet, which boasts net cash of $615.5 million, or $2.61 a share. The stock, down to 9.50 a share from its 52-week high of 23.73 in February a year ago, should hit 17 in 12 months, Poole predicts.

Her other top choice, Chico's, isn't on Wall Street's favored list despite being one of the most successful companies in retailing. But it attracted a number of new customers after Michelle Obama appeared on the ABC television show The View last summer wearing a Chico's "Tank Leaf" print dress.

Chico's operates some 1,100 women's specialty stores in the U.S., selling private-label casual to classy clothing, intimates, and accessories. Its three brands target women who are "worldly, social, and a little more cosmopolitan than the average missy," says Poole, who rates Chico's outperform.

The shares hit a high of 10.72 on Feb. 27, 2008, then got knocked down to 1.72 by Nov. 20, and have since rebounded—to 4.13 on Feb. 17. Poole sees the stock at 6 or more in a year. She says a new management team, coupled with the company's "solid balance sheet and long-term growth potential," makes Chico's attractive.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Why Compellent Attracts

Not many stocks have been able to stay at or near their highs since the recession hit. One that has done so is little-known, Big Board-listed Compellent Technologies (CML). A reason for its fast growth: Compellent's low-cost data-storage networks provide features that usually can be obtained only from pricey, high-end systems offered by larger rivals, says Rajesh Ghai of ThinkEquity, who rates it a buy.

Compellent beat consensus fourth-quarter earnings estimates, prompting Ghai and other analysts to lift their estimates and price targets. Its shares, now at 13.31, aren't far from their 52-week high of 15.20 reached on Aug. 15. Ghai sees them at 16 this year. He figures Compellent will earn 19 cents a share in 2009 and 40 cents in 2010, up from 6 cents in 2008.Troy Jensen of Piper Jaffray, who rates the stock a buy, says Compellent is taking share from all the major storage companies.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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