For Once, It Could Pay To Buy Retailby
At first blush, searching for value in today's stock market seems akin to shopping for bargains on Rodeo Drive. Sky-high tech stocks have fueled a 23% rise in the market so far this year. But some money managers say there's still one sector offering good buys with little risk: retail. "This is the first time in a long time I've been positive on the group," says NatWest Securities Corp. analyst Robert F. Buchanan. "We're seeing a window of opportunity."
Retailers have suffered as tough competition, overcapacity, and shrinking demand have cut profits. For 21/2 years, Standard & Poor's broad retail stores composite index has trailed the S&P 500-stock index. Lately, though, the broad retail index has come alive. Behind the move: a pickup in sales and a belief that the stocks have nowhere to go but up.
DARLINGS. Despite the U.S. economy's second-quarter slowdown, consumer spending is steady and, according to certain analysts, poised for a rise. The winners, according to Walter Loeb of retail consulting firm Loeb Associates, will be department-store chains such as Federated Department Stores Inc. "It has strong management and very strong operating potential--as they consolidate the operations [of Federated and Macy's]," he says. At 287/8, the stock's price-earnings ratio is a mere 11.7 based on his forecast of 1996 earnings. Loeb thinks the stock could hit 33 soon. He also likes Sears Roebuck, Walgreen, and Home Depot.
Beleaguered Kmart Corp. is another favorite. "There's not a big downside, and there is a lightning rod of change available" in the new chairman, Floyd Hall, says Michael D. Jamison, a managing director at Brandywine Asset Management. At 153/4, the stock trades at 1.2 times book value, fitting into Jamison's value criteria. He also likes Melville Corp., a $35 stock with a p-e of 15. Jamison thinks the retailer will be able to refocus mall operations.
Onetime market darling Home Depot Inc. is attracting attention again. The stock of this home-improvement chain quintupled between 1990 and 1992 but has barely budged since. "What we like most is the growth from its Expo Design Stores, its home-decorating store," says Prudential Securities Inc. analyst Wayne Hood. Four stores will open by yearend, and Hood says there is potential for 100 stores over the next five years. The stock, at 44, has a p-e of 21, based on forecasted 1996 earnings. That's not cheap, but Hood predicts 30% earnings growth and thinks an improved housing market will boost the stock. Loeb, another fan, thinks the stock could rise to 53.
Even some pricey retail stocks are on analysts' lists. Buchanan calls bookseller Barnes & Noble Inc. an "outright buy," even with a p-e of 23 on 1996 earnings. That's O.K., he says, since he estimates earnings growth of 30% for the next several years.
Retail stocks will never have the same glamour as the high-tech highfliers. But after underperforming for so long, they don't share tech stocks' downside risks.