Avoid Retail Disaster in 2008

Given worries about the economy and consumer spending in 2008, retail stocks have been taking about as much of a beating as the beleaguered financial industry.

That's shocking, given the financial industry's massive troubles; it also really says something about current pessimism surrounding consumer spending. There's reason for concern: Recent data showed that consumer confidence is at a two-year low.  

So is it time to run away from all retail stocks? Not at all. Bargains are lurking in this battered sector. But there are also a few stocks that investors are best off avoiding.

Investor, beware
I spend much of my time following retail stocks, and one sector in specialty retail that's fallen on particularly hard times is the one dedicated to older female shoppers. It's tempting to think that retailers like Talbots (NYSE: TLB  ) and Coldwater Creek (Nasdaq: CWTR  ) are cheap at the moment -- Talbots is down more than 40% over the past 12 months; Coldwater Creek is down 70%.

However, I've recently wondered if these women's retailers are suffering from a double whammy of sorts. First off, it's arguable that demographic shifts in the way older women dress and view themselves mean some retailers aiming for these customers just don't get their core customers anymore. After all, today's 40-year-old dresses, acts, and maybe most important, feels much different than a woman her age did two decades ago. Furthermore, with consumers feeling pinched for cash, it's likely that more mature women are more conservative with their discretionary cash, and in troubled times, will keep a tighter hold on their wallets than your typical Abercrombie & Fitch (NYSE: ANF  ) shopper.

I'd stay away from Gap (NYSE: GPS  ) and Hot Topic (Nasdaq: HOTT  ) , too. Both of these retailers have been struggling with a turnaround for several years now. If they haven't been able to get it right when consumers are feeling good, can they get it right when consumers are freaked out? I wouldn't want to make that bet right now.

Searching for bargains
On the other hand, there's no reason to throw the baby out with the bathwater. There are some shockingly cheap retailers that look like great long-term bargains.

Consider Aeropostale (NYSE: ARO  ) , which shows no sign of having lost its fashion sense despite recent negativity. It's trading at just 14 times forward earnings, and its PEG ratio is a tempting 0.95. It caters to teens, who (as any parent knows) tend to possess a natural insulation against macroeconomic fears.

And then there's Best Buy (NYSE: BBY  ) . Although consumers' appetites for pricey electronics might decrease in the short term, Best Buy's leadership qualities and customer-centric approach should shore it up against rivals like Circuit City and Radio Shack, even in bad times. Best Buy trades at just 13 times forward earnings and sports a PEG ratio of 1.02 -- tempting multiples for investors with a long-term horizon.

Shop smart in 2008
When everybody's running to stuff their cash under their mattresses, it's the optimum time to go looking for bargain-priced stocks. The market's short-term fears can present the best long-term investments.

Aeropostale and Best Buy are certainly worthy of further research. If you'd rather have a list of ideas that have been vetted by a top-notch team of analysts, grab a copy of our just-released premium report, Stocks 2008.

My own Stocks 2008 pick is a retail stock that I find incredibly cheap right now. It's entering some new markets, and it offers customers a fashionable value proposition, which, if times get tough, should thrive by tempting savvy, price-conscious young shoppers.

For information about The Motley Fool's year-ahead stock report, Stocks 2008: The Investor's Guide to the Year Ahead, click here. You'll find 11 stock ideas for the year ahead, retail and beyond, as well as one fund idea.

Alyce Lomax does not own shares of any of the companies mentioned. Gap and Best Buy are Motley Fool Stock Advisor and Motley Fool Inside Value recommendations. The Fool has a disclosure policy.


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