7 Beaten-Up Value Stocks on the Rebound

These beaten-up value stocks have turned into huge winners over the past month

Source: Shutterstock

Over the past month, U.S. equity markets have experienced a unique, sharp and violent shift from momentum stocks to value stocks. For almost the entirety of the current bull market, momentum stocks have outperformed value stocks. Over the past decade, the iShares Momentum Factor ETF (BATS:MTUM) is up about 140%, versus a 70% gain for the iShares Value Factor ETF (BATS:VLUE).

But over the past month, value stocks have started to outperform. During that stretch, the Value Factor ETF is up 8%. The Momentum Factor ETF is up just 2%.

Stepping back, this shift is actually a bullish indicator for markets.

Violent shifts from momentum to value like this don’t happen that often. But when they do, they usually precede cyclical bull markets, because it is essentially investors ditching their winners and more broadly buying beaten-up, economically-sensitive stocks in a vote of confidence that economic conditions are improving.

As such, this shift is a good thing for markets. It means investors think that U.S. economic conditions are improving. If U.S. economic conditions do improve, then that will provide a tide which should lift most boats in the market. The investment implication? Red-hot value stocks that have regained their footing over the past month could stay hot for the foreseeable future, as U.S. economic conditions improve and markets charge higher.

With that in mind, let’s take a look at seven beaten-up, dirt-cheap value stocks that have staged huge rebounds over the past month. Some of these value stocks should stay in rally mode. Others won’t. It’s important to know the difference.

GameStop (GME)

Stocks to Buy Under $10: GameStop (GME)
Source: Emil O / Shutterstock.com

Price-to-Sales Multiple: 0.07

% Gain Over Past Month: 45%

Video game retailer GameStop (NYSE:GME) has been one of the most hated stocks on Wall Street for a long time. About five years ago, some investors and analysts started making Blockbuster comparisons, arguing that GameStop was headed for extinction as the video game market went entirely digital. Today, almost everyone thinks that, and that’s why GME stock is down 90% over the past five years and trades at an anemic 0.07-times trailing sales multiple.

But GME stock is up a whopping 45% over the past month, marking its biggest rally in recent memory. The catalyst? A few things. First, Michael Burry — The Big Short guy who called the 2008 housing bubble — publicly proclaimed that his fund owned a sizable chunk of GME stock, and made a case for how/why shares should head materially higher. Second, investors started getting excited about the upcoming gaming console refreshes in 2020. Those new consoles will still have hard drives, so they will presumably lead to higher hardware and software sales for GameStop. Third, data analytics firm Placer.ai said that foot traffic at GameStop has been trending higher this summer.

In other words, a convergence of multiple fundamental and optical catalysts have sparked the big 45% rally in beaten-up GME stock. Will the rally continue? I think so. The stock is still dirt cheap, and it’s heading into what promises to be a big two years in 2020/21. Ahead of those big years, so long as the stock remains cheap, I reasonably see investors continuing to bid up GME stock.

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Stage Stores (SSI)

Source: WhisperToMe via Wikimedia Commons

Price-to-Sales Multiple: 0.03

% Gain Over Past Month: 105%

Department store operator Stage Stores (NYSE:SSI) has also been one of the most hated stocks on Wall Street over the past several years. Once upon a time, this was a stable department store company. Then, e-commerce disruption happened. Stage Stores didn’t adapt appropriately. Their stores became increasingly outdated and irrelevant. Customers left in droves. Sales dropped. Margins were eviscerated. Profits were wiped out. The stock dropped — by 90% over the past five years. But Stage Stores is finally starting to adapt in a meaningfully way — and investors are paying attention.

Specifically, Stage Stores owns both full-price department stores and off-price department stores. They are in the process of converting their full-price stores into off-price stores, and in the end, hope to become an off-price department store operator like TJX (NYSE:TJX) or Ross Stores (NASDAQ:ROST). The exciting part here is that those off-price stores for Stage Stores are actually doing pretty well, so if that success can be replicated across the whole portfolio with this transformation, then SSI stock could fly higher from here.

Clearly, investors are excited about this off-price transformation plan. SSI stock has more than doubled over the past month. Can the rally continue? Tough to say. The transformation plan sounds good. But it’s also a tall order — because the off-price segment is fully saturated and very competitive. Can Stage Stores craft a niche in that off-price world? I’m not so sure. Plus, it feels like the 100%-plus rally over the past month has been driven mostly by short covering, and it remains to be seen how much longer this tailwind can last.

Express (EXPR)

Price-to-Sales Multiple: 0.09

% Gain Over Past Month: 40%

Mall retailer Express (NYSE:EXPR) has had a tough time ever since e-commerce disrupted the entire mall retail landscape. Over the past five years, Express has failed to sufficiently differentiate itself in a crowded mall retail world fighting over reduced traffic, and the numbers have consequently taken a hit. Comparable sales have been choppy. Margins have been under pressure. Profits have been killed. So has the stock, which is down 80% over the past five years.

Over the past month, though, EXPR stock is up 40%. The rally is a bit of a head-scratcher. In late August, Express reported second quarter numbers that simply weren’t very good. Comps were sharply negative. Gross margins dropped. The opex rate rose. Profits were wiped out. But those bad numbers did top even worse expectations — so EXPR stock has been in rally mode ever since.

Will the rally continue? I think so. In the big picture, I like Express as a retail survivor. They cater to a young, technologically savvy demographic, and as such, already have a huge digital business which should do well in the long run. Sure, that big digital business comes with higher fulfillment expenses and lower gross margins, but management is figuring this out, and margins will stabilize in the long run. Thus, in the long run, I think Express projects as more stable than what it is today — and that stability should ultimately lead to a higher price tag for EXPR.

Rite Aid (RAD)

Source: Jonathan Weiss / Shutterstock.com

Price-to-Sales Multiple: 0.02

% Gain Over Past Month: 50%

Over the past five years, specialty pharmacy retailer Rite Aid (NYSE:RAD) has often been thrown in the basket of companies that no longer needs to be around, now that Amazon (NASDAQ:AMZN) exists everywhere. During that stretch, Rite Aid has failed to report consistently positive sales growth, margins have been under pressure, and profits have dropped. RAD stock has dropped, too. It’s down 95% over the past five years.

But the same company which killed Rite Aid over the past five years — Amazon — could be the one which brings it back to life. Specifically, Rite Aid and Amazon recently scored a partnership together wherein Rite Aid will become a fulfillment center for Amazon, so Amazon customers can pick-up their Amazon.com orders from their local Rite Aid store. That’s big. It means Rite Aid will start to see a traffic bump from Amazon customers who don’t have much overlap with the Rite Aid customer base.

The bull thesis is that some of these new Amazon customers will actually start to shop at Rite Aid stores in greater frequency, and provide a meaningful, long-running tailwind for Rite Aid’s sales, margins, and profits. Ahead of this catalyst, investors are bidding up RAD stock. It’s up 50% over the past month. But my advice here is to not count your chickens before they hatch. The bull thesis on Rite Aid gaining Amazon customers sounds good — will it happen? It’s highly uncertain, and until the numbers prove it, I don’t think there’s much reason to chase the rally here.

Pier 1 (PIR)

Source: Jonathan Weiss / Shutterstock.com

Price-to-Sales Multiple: 0.03

% Gain Over Past Month: 220%

Much like Rite Aid, home furnishings retailer Pier 1 (NYSE:PIR) has, over the past five years, been consistently thrown in the bucket of retailers that will get squeezed out by online competition. Specifically, as retail sales have migrated to the online channel over the past several years, home furnishing retail sales have made a similar migration. As they have, Pier 1 has lost share to online home furnishing retailers like Wayfair (NYSE:W). Pier 1’s sales, margins, and profits have consequently all been under pressure, and PIR stock has lost 95% of its value over the past five years.

But PIR stock has gone parabolic over the past month. During that stretch, PIR stock has more than tripled — and on very little news. Long story short, the depressed retailer made some executive changes and brought in some respectable names to help right the sinking ship. That caused shorts, who had piled into the stock betting on bankruptcy, to cover. This short-covering has led to a 200%-plus rally in the stock in a month.

Can this red hot rally continue? I have my doubts. Pier 1’s balance sheet isn’t pretty, and the last time we got a look at the numbers back in June, they weren’t pretty either. This whole 200%-plus rally in PIR stock is based on hope that new management can execute a turnaround. Call me a skeptic, but given how competitive the home furnishings market is and how undifferentiated Pier 1 is in that market, I won’t believe a turnaround is coming here until the numbers show it. I also think that’s how most investors feel — so once this short-covering dries up, the stock may be stuck in no man’s land until the numbers turn a corner.

Signet (SIG)

Price-to-Sales Multiple: 0.14

% Gain Over Past Month: 30%

Fine jewelry retailer Signet (NYSE:SIG) has had a tough time selling fine jewelry over the past several years for three big reasons. First, Generation Z and Millennial consumers are increasingly pushing back big life events, like getting married. Second, those same young consumers don’t value expensive jewelry and diamonds like their parents. Third, the fine jewelry market has become increasingly flooded with lower-priced competition. The result? Plunging sales, margins, and profits — and a plunging stock. SIG stock is down 85% over the past five years.

But Signet’s first quarter numbers reported in early September were much, much better than expected, and gave credence to the turnaround thesis here. Comparable sales still dropped, but they dropped by less than they have been dropping. Gross margins started to show signs of stabilization. Operating margins came in much better than expected amid aggressive cost cutting. Profits topped expectations by a mile. In response to the much better than expected numbers, SIG stock soared. It’s up 30% over the past month.

Does this rebound have more runway left? I think so. Demand for fine jewelry isn’t going anywhere. Sure, in the near-term, it will fluctuate. But in the long term, consumers will always get married, and they will always buy engagement rings and wedding bands. Right now, it seems like Signet is bouncing out of a near-term downturn, and is in the process of getting back to stable long-term demand. If the company does get back to consistently growing sales and profits, then SIG stock will continue to march higher from here.

J.C. Penney (JCP)

Source: Supannee_Hickman / Shutterstock.com

Price-to-Sales Multiple: 0.02

% Gain Over Past Month: 65%

Department store operator J.C. Penney (NYSE:JCP) has been the poster child for “fallen from grace retailers” over the past several years. Once upon time, J.C. Penney was at the heart of the American retail landscape. That was back when everyone did their shopping at malls. Today, less shopping is done at malls, and more shopping is done online. J.C. Penney didn’t adapt quickly enough to this consumption shift, and because it happened so quickly, the company was left in the dust. Today, J.C. Penney is a struggling department store that many believe is on the verge of bankruptcy.

But over the past month, JCP stock is up 65% as such bankruptcy concerns have eased for three big reasons. First, there’s been a ton of insider buying, and that has given bulls confidence. Second, J.C. Penney has a launched a new men’s outdoor apparel brand, which many see as a step in the right direction towards stabilizing sales and margins. Third, the company has had talks with creditors to relieve some debt pressure before the 2019 holiday season.

In other words, JCP has taken some very constructive steps over the past month, the sum of which has given bulls confidence that a turnaround isn’t so unlikely. But I still think a turnaround is very, very unlikely. In the big picture, the consumer doesn’t need J.C. Penney anymore — they can get everything they want, at the prices want, with unparalleled convenience from Walmart (NYSE:WMT), Target (NYSE:TGT), Amazon, Nordstrom (NYSE:JWN), and Macy’s (NYSE:M). The only way JCP starts to compete at scale with those guys is to put as much money and resources into its digital and omni-channel capabilities as everyone else — which they cannot do, because they don’t have as much money or resources, and are burdened by a debt-heavy balance sheet.

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As of this writing, Luke Lango was long GME, TJX, ROST, AMZN, W, and SIG. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/7-beaten-up-value-stocks-on-the-rebound/.

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