Retail stock are on fire right now. Across the board, quarterly earnings from retailers have been quite good, and CEOs are pounding on the table about how this may be the strongest consumer environment in recent memory.

In response, retail stocks popping… well, not all retail stocks. Someone forgot to pass along the good news to Gap (NYSE:GPS), L Brands (NYSE:LB) and J.C. Penney (NYSE:JCP). All three of those retailers dropped big after their most recent earnings reports. GPS stock slid 10%. LB stock dropped 10%, too. JCP stock tumbled 25%.

From that group, I don’t like JCP stock. Brick-and-mortar retail is shrinking and, naturally, some retailers will get squeezed out in that shrinking. The retailers getting squeezed out are the ones with a small digital footprint, a debt-loaded balance sheet and an undifferentiated brand. JCP fits that description, alongside Sears (NASDAQ:SHLD), and I think both of those retailers are on their way to bankruptcy.

With respect LB stock, there is upside to be had there in the long run. The brand is struggling in its intimates business with Victoria’s Secret and now Pink. But brand value is high, the moat is big and the other side of the business (Bath & Body Works) is doing very well. Thus, LB stock has big upside in a long-term window. But that upside won’t be realized until Victoria’s Secret and Pink rebound.

Then there’s GPS stock.

Of all three retailers that missed this quarter, I think GPS stock offers investors the best near-term buying opportunity. Gap’s quarter was pretty good, despite the sell-off, and GPS stock has now dropped into low-valuation territory that usually signals a near-term bottom. As such, I think GPS stock will bounce back quickly from this post-earnings drop.

Here’s a deeper look.

Gap’s Quarter Was Pretty Good

Investors are concerned about persistent weakness at Gap brand stores. But, if you look past that headline weakness, Gap’s second-quarter report was actually pretty good.

Old Navy remains red hot. Comparable sales rose 5% versus 3% last quarter and 5% a year ago. Thus, growth isn’t slowing down year over year, and it is actually accelerating sequentially, as one would expect in this red-hot retail environment.

Banana Republic is finally bouncing back. Comparable sales rose 2% versus 3% last quarter and down 5% a year ago. It isn’t great to see comparable sales growth decelerate sequentially, but the long-term trend is a brand that has gone from negative growth to positive growth — and that trend remains in-tact.

Meanwhile, Gap is struggling. Gap brand comparable sales dropped 5% in the quarter, versus a 4% drop last quarter and 1% drop in the year-ago quarter. That’s no good. But if you consider that this quarter’s lap was much tougher than last quarter’s lap, comparable sales trends at Gap are actually improving. On a 2-year stack basis, comparable sales were down 8% in Q1. In Q2, they fell just 6%.

That isn’t great. But, it is baby steps in the right direction.

Meanwhile, gross margin compression also moderated in the quarter, down just 10 basis points versus a 120 basis point drop in Q1. Moreover, management sounded a bullish tone regarding margins on the conference call, pointing out that they are prioritizing margin dollars over comp growth.

In the big picture, Gap is a retailer that is broadly doing well, with one exception. That one exception is showing signs of progression. Considering that the consumer is really strong and confident right now, and that we are only a few months away from the holiday season, it isn’t unreasonable to expect that one exception to bounce back soon.

When that happens, GPS stock could rally with the rest of the retail sector.

Gap Stock Just Dropped Into ‘Buy’ Territory

Long-term, the bull thesis on GPS stock is predicated on a rebound in the Gap brand alongside a broad retail rally into the holiday season. Near-term, though, the bull thesis on GPS stock is predicated on the fact that GPS stock just dropped into low-valuation territory that usually signals a bottom.

The recent plunge in GPS stock has dropped the forward earnings multiple to 11. GPS stock has dropped to that level three times over the past 12-plus months (July 2017, May 2018, and July 2018). Each time, GPS stock proceeded to stage a sizable rally over the subsequent few weeks to months.

I think a similar dynamic will play out here and now.

The consumer and retail backdrop are simply too strong right now. Investors won’t let a retailer with positive comparable sales growth and future margin expansion potential trade at 11X forward earnings. As investors shift into this space for more exposure to the retail rally, GPS stock could be the choice pick among investors who still want a bargain.

This shift will likely happen rather quickly considering the pace of the retail recovery. As such, I think GPS stock bounces back here and now.

Bottom Line on GPS Stock

The post-earning sell-off in GPS stock is a gross overreaction. The numbers are pretty good and the fundamentals across the whole sector are even better.

Given this, GPS stock should rebound from here, and head higher into the holiday season.

As of this writing, Luke Lango was long GPS and LB.