Mr. Market's Clearance Sale

Each weekday, I take a few minutes to poke fun at stocks that are freefalling for a good reason. With so many companies on the juice, the pickings are usually ripe.

Not yesterday. Yesterday, Mr. Market had a clearance sale.

The housing market is collapsing! The housing market is collapsing!
What spooked him? The housing market, apparently. Standard & Poor's reported a 6.7% decline in home prices in October -- the worst performance in 17 years. Struggling builders Standard Pacific (NYSE: SPF  ) and Meritage Homes (NYSE: MTH  ) sold off sharply after the report.

But Mr. Market wasn't done. Today, he's selling manufacturing companies because of a poor durable-goods report. Meanwhile, in Pakistan, the tragic and very public killing of former Prime Minister Benazir Bhutto has sparked renewed fears of violence in that country and the surrounding region. Oil prices are up sharply as a result.

It's enough to make even the most iron-willed stock picker go shopping for a bomb shelter in east Wyoming.

But that would be an awful move. Bad days in the market have a way of punishing good stocks as well as bad ones. Yesterday, for example, the majority of retailers took a beating after Target (NYSE: TGT  ) once again reduced its same-store-sales guidance.

Here are three that I believe Mr. Market marked down unfairly:

Company

Closing Price

CAPS Rating (5 max)

% Change

52-Week Range

Big Lots (NYSE:BIG)

$15.65

*

(6.06%)

$15.59-$36.15

Guess? (NYSE:GES)

$40.96

***

(4.37%)

$30.47-$57.20

Gymboree (NASDAQ:GYMB)

$31.23

**

(4.82%)

$28.36-$45.95

Sources: The Wall Street Journal, Yahoo! Finance, Motley Fool CAPS.

I've no doubt that a prolonged decline in consumer spending would further depress each of these stocks. That's probably why those who've rated them in our Motley Fool CAPS database give these retailers generally below-average scores. But, long term, I like the advantages that each possesses.

Guess?, for example, is an emerging tweener that's challenging for a greater portion of the youth market. Big Lots could see increased traffic as its closeout bargains become more appealing to penny-pinching shoppers. Gymboree is far more effective in producing returns on capital than is its closest peer, The Children's Place. And did I mention that all three of these stocks appear cheap when compared with their projected growth?

See for yourself:

Company

Forward P/E

2008 PEG

Big Lots

9.74

0.58

Guess?

16.80

0.68

Gymboree

10.64

0.86

Source: Capital IQ, a division of Standard & Poor's.

I could be wrong, of course. But if stock market history proves one thing, it's this: Mr. Market is shakier than a Chihuahua in a freezer. You never know what his gyrations are going to bring. Yesterday, it was bargains. Tomorrow, it could be a rash of unreasonable mark-ups.

That leaves us with today. In the here and now, Mr. Market is tossing out above-average retailers such as Big Lots, Guess?, and Gymboree like confetti at a New Year's Eve bash. Pass the punch, Fool. There's a party in your portfolio.


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