The market is undergoing another round of selling thanks to fears of a banking crisis in Europe and the prospect of a global double-dip recession. Who in their right mind can buy stocks at such a time?
The answer is you.
Time and time again it has been proven that the time to buy is when fear is at its highest. The volatility index, a measure of fear in the market, has been above 30 for what seems like forever. At some point the spell will be broken and stocks will rally once again.
With the S&P looking to bounce off its yearly low of 1,100, now might be the perfect time to go shopping for stocks. Even if we are simply range bound, buying stocks now can result in 10% to 20% gains in the course of only a few months.
What stocks should you buy today?
One sector hit particularly hard by recessionary concerns is the retail space. In particular, clothing retailers have been pummeled in the current environment. Many stocks are down significantly from their highs. While some of the selling might be justified, there are plenty of names doing well in the space that merit consideration for any portfolio.
In this market, stock correlation is the highest it has been since 1987. That means fundamentals are being ignored and fear is gripping individual stocks across the board. At such times, bargain hunters can exploit high correlation and inefficient pricing. To the extent a company is performing on an operating basis delivering solid growth in earnings, gains can be had buying stocks today.
Typically, news events like earnings reports can break the spell of a highly correlated market. A company with solid fundamentals is likely to trade higher in a down market when operating results are strong. You know times are tough when that is not the case.
Recently, Express (NASDAQ:EXPR) reported earnings for the quarter ending July 31. The company reported a profit that beat Wall Street estimates by two cents per share. In addition, Express raised guidance for the year. The reaction to the news initially was positive, but by the end of trading on the first day after the report was released, shares retreated.
Shares of Express are cheap. The company has beaten the average Wall Street estimate in each of the last three quarters. For the full year ending Jan. 31, 2012, Wall Street is looking for the company to make $1.61 per share. That number increases by 16%, to $1.86 per share, in 2013. At current prices, shares of Express trade for just 11 times current-fiscal-year estimated earnings.
Bargain hunting is all about finding business models that work. In the clothing retail space, one category that appears to be immune to the weakness in the economy is on the high end. The rich continue to spend money, boding well for companies like Guess (NYSE:GES) to grow profits no matter what transpires in the future.
On Aug. 24, Guess reported profits for the quarter ending July 31. For the period, the company generated earnings of 84 cents per share. That beat the average Wall Street estimate by three cents per share. That makes several quarters in a row of such outperformance. Of course, investors shrugged as guidance for the future was a bit less than expected.
Does the lowered guidance really matter? I don’t think so. For the full year ending Jan. 31, 2012, Guess expects a profit range of $3.25 to $3.35 per share. The Wall Street estimate had been for annual profits of $3.43 per share. For the following year, the Wall Street estimate is for profits of $3.82 per share.
Using the midpoint of company guidance, or $3.30 per share, Guess trades for just nine times current fiscal year profit expectations. With Wall Street profit growth estimates of 16%, the stock is extremely cheap even if earnings miss by a few cents per share. I would use any selling in the stock as an opportunity to buy.
In a volatile market, the tide can change quickly. One of the best-performing clothing retailers in 2010 was teen retailer Zumiez (NASDAQ:ZUMZ). Shares doubled in value as the company’s profits exploded. 2011 has been entirely different. Shares are down 33% this year.
I know trends can change quickly in the fashion business, but has anything really changed for Zumiez? I don’t think so. The company’s line of clothing, and snowboarding and skateboarding gear, is as desirable as before. The problem for investors is earnings growth momentum has slowed. Add in the prospects of a double-dip recession and you have a stock that is now cheaply priced.
At the end of August, Zumiez reported earnings for the quarter ending July 31. Once again the company beat earnings estimates, as it has done for multiple quarters now. As it was for Guess, the current-quarter outlook for Zumiez was light. That weak guidance was all it took to take the luster off an otherwise strong report.
After the report, Wall Street estimates were ratcheted lower. Still, the company is expected to make $1.05 per share for the current fiscal year ending Jan. 31, 2012. For the following year, Wall Street has earnings growing at a 20% clip, to $1.26 per share. With shares trading for 17 times current-year estimates, Zumiez is a bargain. I would buy the stock at these prices.
Jamie Dlugosch does not hold positions in any of the stocks mentioned.