Over the years, I have done very well with retail stocks. I’ve probably had a couple of losers along the way … but at the moment I don’t really recall any. I have had some adventures like my foray into Conn’s (CONN) back in 2009 where the stock fell by more than 50% … but that’s before it eventually rose to a few multiples of my purchase price.
My recipe for success is simple. I buy retail-oriented stores that aren’t losing money and that trade below book value. I won’t buy until my retail consulting team (which consists of my wife and kids) have given the OK and tell me they still shop with those companies. Then I hold the stocks for however long it takes for conditions and the price to improve dramatically. It is a version of Sir John Templeton’s “buy at the point of maximum pessimism” approach with sound input from people who actually shop. (I don’t shop if I can avoid it, so the consulting team is invaluable.)
Given the pessimism surrounding retail stocks at the moment among the gurus and pundits, you would think that bargains would abound in the space. They don’t. Even the teen and young adult retailers that are seeing dismal results, such as American Eagle (AEO) and Aeropostale (ARO), trade above book value. Even JCPenney (JCP), a company constantly dancing on the edge of disaster does not trade at a discount to book value right now.
In fact, when I ran a simple screen for retail stocks that are trading below book value and not losing money, I came up with only three names: