For most retailers, the fourth quarter of the year is the single most important of the year. They cover their bills and costs in the other nine months, but the holiday buying binge makes or breaks the year.
Traders and analysts breathlessly track each scrap of information about traffic and sales in December to determine which retail stocks to buy based on the trends they hope they see correctly. Frankly, it’s all a bit silly. There are just too many unknowable factors to determine which retailers are going to see a huge bottom-line improvement and which will discount themselves into an earnings disappointment.
I have done very well over the years with retail stocks. Some of my biggest winners of the past two decades have been retailers I purchased using a very simple concept: I only buy retail stocks below book value, and I always ask people who are more shopping-savvy what they think of the store. If my wife and daughter like the store, odds are that others are still shopping there as well — and a turnaround is likely. I also avoid heavily indebted retailers, as a single misstep in this industry can lead to bankruptcy liquidation.
I sat down this morning and looked for some cheap retail stocks that look they could survive and thrive over the next few years. It is a very short list at the moment.
The biggest retail stock name on the list is JCPenney (JCP), which is selling at a discount to book value … but the survival factor here is dubious. The debt-to-equity ratio is almost 2, and there is no margin of safety in the stock at all.
Radio Shack (RSH) is on there and is pretty much a cigar butt stock at this point. I still own some from a couple of years ago — but I wouldn’t buy it again right now. I simply could not find anyone who has been in store in several years now.
One Lonely Safe Retail Stock
The lone retailer that I would be willing to buy at this moment is Trans World Entertainment (TWMC). The company is in the music and video business — admittedly a dying breed — but it is successfully transitioning to “trend items” including electronics and video games. Trans World has negligible debt and plenty of cash, so there is a decent margin of safety in the balance sheet. TWMC stock is also cheap, at 80% of book value. It is the only retailer I can find this year that is both safe and cheap enough to buy.
At the time of publication, Melvin was long RSH and TWMC.