Worst Stock for 2008: Gap

Resolve to keep your portfolio healthy: Help us pick the worst stock for 2008.

Like a group of fashion-conscious 40-somethings with closets full of "vintage" parachute pants from the '80s, shareholders have been waiting for The Gap (NYSE: GPS  ) to come back into fashion. Unfortunately for them, a new generation of shoppers has mostly turned up their noses at the company. And despite several attempts to turn things around, Gap hasn't demonstrated an ability to re-create the successes of previous decades.

The bottom of the barrel
Retail stocks across the board have been struggling lately, with concerns about recession and a potential drop-off in consumer spending scaring many investors out of the sector entirely. The resulting depressed prices on stocks from J.C. Penney (NYSE: JCP  ) to Hot Topic (Nasdaq: HOTT  ) have some value-minded investors acting like a horde of caffeine-crazed shoppers at 4 a.m. the day after Thanksgiving. But even at valuations that look attractive, you still have to be a smart shopper to avoid retail value traps.

For much of the decade, Gap has been a prime example of such a trap. After falling about 80% in the bear market that ended in 2002, Gap recovered briefly, but its shares have been stuck at the same levels since 2003.

A look at the company's financials gives plenty of reasons why the shares haven't moved. Revenues haven't budged in four years. Earnings for the last 12 months are lower than they were in 2004. Yet the stock still trades around 18 times trailing earnings -- a level that only renewed growth can justify.

Going nowhere
But it still isn't clear where that growth is going to come from. Same-store sales in December dropped for all three of Gap's store concepts. Banana Republic is the only concept with positive comps for the year, and they're up only 1%. Meanwhile, Old Navy and the flagship Gap stores remain in their three-year negative same-store sales funk.

Meanwhile, Gap's competitors aren't standing still. Abercrombie & Fitch (NYSE: ANF  ) has nearly twice the gross margins of Gap and boasts a return on capital of more than 35%, yet it trades at a lower earnings multiple. And even though growth estimates at American Eagle Outfitters (NYSE: AEO  ) have fallen in recent months, analysts still expect it to grow faster than Gap -- even though Gap's current P/E ratio is almost double American Eagle's.

What investors think
On Motley Fool CAPS, where more than 80,000 professional and novice investors have rated more than 5,300 stocks, many investors have given up on Gap. The stock only recently climbed its way out of the cellar to earn a two-star rating on the five-star scale. Out of almost 500 players who've rated the stock, more than 200 think Gap will underperform the S&P 500. And among raters who are CAPS All-Stars -- those with the best records on CAPS -- more than half pick Gap to fall short.

In short, if you've got some Gap shares hidden in the back of your portfolio (even after we nominated it as the worst stock for 2007), it's time to face up to the embarrassment and look for a more stylish investment. Your wallet will thank you.

Do you agree? If so, head over to CAPS right now and give Gap a thumbs-down. And while you're there, take a look around and see all the ways CAPS can make you a better investor.


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