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:
Cheap Retail Stocks to Buy – West Marine (WMAR)
West Marine (WMAR) is a stock I talked about last week as an insider pick because the founder still owns a huge chunk of the company. The boating and marine products lifestyle retailer has 287 stores and has been building its online presence the past few years.
The basic story here is that WMAR is a pretty well-run company that just needs a stronger economy to bring the recreational boaters back out in force. The company is debt-free and profitable, so it should be able to survive long enough to thrive.
WMAR stock currently trades at just 90% of book value, so it’s still a bargain.
Cheap Retail Stocks to Buy – HHGregg (HGG)
HHGregg (HGG) has been a having a tougher time of it lately. The electronics, appliances and furniture retailer has been struggling a bit and is currently breakeven for the past four quarters.
Management seems to have paid attention to the turnaround executed at Conn’s over the past few years and is taking steps to ramp up the more profitable appliances and furniture business, as well as expand the use of their in-house credit programs to boost the bottom line.
HGG stock trades at just 94% of book value, so there is a lot of upside if HHGregg can execute a successful turnaround.
Cheap Retail Stocks to Buy – Trans World Entertainment (TWMC)
Trans World Entertainment (TWMC) is in what can only be described as a rotten business. Trans World has more than 350 stores selling things like music, videos and consumer electronics. TWMC operates under the F.Y.E Entertainment and Suncoast Video brands in the majority of its locations, but also has developed an online presence to sell their products.
Low-cost large competitors like Walmart (WMT) and Amazon (AMZN) have made this a difficult business to say the least.
Trans World is hanging in there, as it has been profitable across the trailing four quarters. Management is doing its best to be shareholder-friendly; TWMC paid a special dividend this year and has been actively buying back stock.
Trans World not only trades below book value, but shares fetch just 84% of current net assets, so while TWMC might not be a great business, it is a true cigar-butt bargain.
This is a fairly thinly traded small-cap stock, so I would suggest you use limit orders should you decide to purchase share after doing your due diligence.
As of this writing, Tim Melvin was long TWMC and WMAR.
