Two Teen Retailing Ideas

Last week, retailers let loose a deluge of financial data for the month of November. While this data is too granular to be used on its own, let's use it as a springboard to check out some other things.

Below is a table of sales and same-store sales data for November, combined with operating margins, returns on invested capital (ROIC), and P/E ratios for the trailing 12 months.

	Nov. Sales	Nov. SSS	TTM Op. Marg.	TTM ROIC	TTM P/E
Abercrom- bie & Fitch (NYSE: ANF  )	13.0%	(3.0%)	19.2%	36.8%	16.1
Aero- postale (NYSE: ARO  )	11.5%	1.0%	11.3%	35.1%	17.9
American Eagle (Nasdaq: AEOS  )	21.0%	14.0%	20.9%	28.0%	21.0
Buckle (NYSE: BKE  )	8.5%	4.2%	15.3%	16.3%	17.5
Pacific Sunwear (Nasdaq: PSUN  )	3.4%	(3.8%)	8.4%	14.8%	18.4

Remember The Little Book That Beats the Market? Joel Greenblatt's book ranks companies based on the ratio of their ROIC and their P/E ratio. In the spirit of his "magic formula," let's see whether we can find some investing ideas.

I ranked the stocks based on their ROIC over the last 12 months, because I wanted to see which one best allocates capital. (Note that these figures are straight from CapitalIQ and have not been adjusted for any operating leases.) We see that Abercrombie & Fitch and Aeropostale have the highest ROICs and two of the lowest P/E ratios. That's a sign that the market is undervaluing their ability to create value. Since that's a tongue-twister that made my own brain hurt, let me translate: Those two companies look like investment opportunities.

American Eagle, certainly the top performer in November, has a fairly priced feel to it, placing it right in the middle of the pack. Meanwhile, if you believe in the company and you're into turnarounds, Pacific Sunwear may be a good one to investigate, given that its operating margin and ROIC are the lowest of the bunch. But you'd better have a good reason why you believe these metrics will increase over time. Otherwise, the company could be a value trap.

Buckle is the most perplexing of the bunch. That's because its ROIC continues to rise, as opposed to Pacific Sunwear, which saw a recent drop in ROIC. So the question with Buckle is not whether it can get itself back on track (it seems to be there already), but whether it can ascend into the major leagues like the companies above it.

There's been lots of press about the volatility of retailers as they report their monthly sales data. While I certainly appreciate the information, I'm not inclined to do anything with it unless I can put it in a larger context. That's where an idea like "the magic formula" can be very helpful. It can let us see whether there's an opportunity brewing as the market reacts to the monthly data when compared to some longer-term performance metrics. Among of this group of retailers, Abercrombie and Aeropostale look to be the most interesting investment ideas.

American Eagle and Pacific Sunwear are Motley Fool Stock Advisor selections. To see which other stocks Tom and David Gardner have deemed worthy of inclusion, take a 30-day free trial of the newsletter.

Retail editor and Inside Value team member David Meier is ranked 207 out of 14,836 in CAPS. He does not own shares in any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.