3 Winners to Watch

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When Warren Buffett's annual shareholder letter comes out, Fool analysts rejoice. Then they dig in, tearing it apart for the clues that will fortify their investing strategies.

This year, analyst Ilan Moscovitz zeroed in on a ratio for determining the quality of a consumer, manufacturing, or retail business -- specifically, comparing earnings to unleveraged net tangible assets. "It's an intriguing, rarely used ratio, one that I'm beginning to appreciate for its ability to neatly capture the economics of a business," writes Ilan. Using a screen based on that formula, he's come up with three stocks that deserve deeper examination (at the very least).

One to watch
The first enticing retailer that Ilan uncovered is lululemon athletica (Nasdaq: LULU  ) , the up-and-coming purveyor of yoga and exercise clothes and equipment. The company is growing rapidly and profitably, and it boasts a comically oversized "Buffett Ratio" of 42%. Its rivals linger far below that mark; check out Ilan's Rising Stars article to get all the details. Additionally, lululemon does $1,318 in sales per square foot, when rivals would be pleased to bring in $500.

Several of the company's key metrics are eye-popping. As Ilan said, "Lululemon's stock is by no means cheap, but we think the company has room to grow into its valuation, and the brand and operational skills to do so." He put his money where his yoga mat is, making a purchase in his Dada portfolio.

Two to watch
Another intriguing company showed up on Ilan's screen, but he scanned right over it because the company name was unfamiliar: Ascena Retail Group (Nasdaq: ASNA  ) . As it turns out, that's the new moniker for the umbrella business that owns Dress Barn, maurices, and Justice. As the Fool wrote in a recent free report:

Ascena has shown it has a repeatable process on the retail side. Its maurices stores (another family business before the Jaffes acquired it five years ago) aim to serve young women with a "twentysomething attitude" who live in small-town markets. Sales have doubled since Ascena bought the chain. Justice, which was acquired when Ascena bought Tween Brand last year, focuses on the tween girl market. Justice's same-store sales are up 17% since the acquisition, and the business should start benefiting from economies of scale in inventory sourcing, real estate, and logistics.

Dress Barn seems to have matured in terms of growth, with only a 1% bump in same-store sales, but the other two parts of the business are performing incredibly well, both according to that metric and the Buffett ratio. And maurices is roughly equal in size to Dress Barn, while Justice makes up the largest chunk of the business. Ilan likes the look of this renamed retailer.

Three to watch
Ilan's not exactly a clotheshorse, but he knows what he likes. After a recent trip to Korea, he came back singing the praises -- and wearing the clothes -- of trendy retailer Uniqlo. Owned by Fast Retailing (Other OTC: FRCOY.PK), the company's shares took a nosedive in the wake of the recent Japanese disaster, since Uniqlo has mature operations in that country. Ilan sees tremendous growth opportunities in other countries, though – there's only one U.S. store, and the company recently stated that it plans to open 200 here by the end of the decade.

He needs to dig in on this company, but in the meantime, he's proudly sporting the Uniqlo clothes he picked up on his trip. And he's got Fast on his watchlist.

To build your watchlist, just click any of the links or enter your email address in the box below. You'll automatically create a free personalized watchlist that already lists the stock, allowing you to keep a watchful eye on these companies. You'll also get instant access to the free report we mentioned earlier, "6 Stocks to Watch from David and Tom Gardner," which features a handful of companies that the Fool's co-founding brothers think you should be watching. The watchlist service and the report are free. Click to get started.

Roger Friedman owns none of the companies mentioned. The Fool owns shares of Lululemon Athletica, which is a Motley Fool Rule Breakers pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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10/20/2016 4:00 PM
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