August was chock-full of negative news for stocks. A single month is nothing, though. Try many quarters -- even years -- of pessimism, as Macy's (M 1.99%), Urban Outfitters (URBN 1.54%), and Axos Financial (AX 0.48%) shareholders have endured. Bad news has tanked all three stocks in the past year.
But bad news often spells opportunity for investors who look beyond the headlines at the underlying business opportunity. Stocks are, after all, shares of businesses with the ability to dynamically adapt to changes in the economy, other business and consumer habits, and more. Thus, though the market has been unkind to Macy's, Urban Outfitters, and Axos Financial, three Foolish contributors think they're cheap and worth a look right now.
Don't underestimate this department store
Nicholas Rossolillo (Macy's): Big changes in retail have given the department store industry a serious black eye. Slow to pick up on the rise of online shopping and dealing with rising competition from big-box stores that have upped their game, department stores have seen their sales in steady decline for years; sales are down another 4% so far in 2019, according to the U.S. Census Bureau.
Macy's has been a big culprit as it closes down stores to rightsize its real estate footprint, while increasing its online presence. The transition has been a rocky one, to say the least. After putting up low-single-digit comparable-store sales (a measure of the number and size of customer purchases at existing locations) in 2018, that metric has reverted to a mere 0.5% increase through the first half of 2019. Along with storefront closures, revenue is down 0.6% and adjusted earnings are down 39.5%.
The iconic retailer entered the year with too much inventory, so heavy discounting has been a big reason for the earnings decline. With the problem fixed, though, management believes it is on track to return to growth, and it's looking for ways to cut expenses. Online sales have been a bright spot; to double down on what's working best, Macy's inked a deal with Alphabet's Google to optimize its inventory and distribution network. While Macy's is certainly down, it's far from out of the game, and remains one of the better-positioned department-store chains to deal with an evolving consumer landscape.
Nevertheless, short-term myopia has sent Macy's stock down over 50% this year, and shares are currently trading for a mere 8.7 times 12-month free cash flow (basic profit after operating expenses and capital expenditures). Toss in the facts that Macy's has reduced long-term debt by 15% since last summer, to $4.68 billion, and that it pays a dividend yielding 10.5%, and this looks like one cheap retail stock poised for a rebound.
Grab this well-oiled profit machine while it's cheap
Anders Bylund (Urban Outfitters): Right now, you can pick up shares of this youth-oriented clothing and lifestyle retailer for just 9.7 times trailing earnings. The stock also trades at less than 7.3 times trailing cash flow, or roughly 0.6 times trailing sales. These valuation ratios sit far below the retail sector's averages, and they also look affordable in comparison to Urban Outfitters' five-year averages.
At the same time, the company is outperforming most of its sector peers in terms of running a solid business. With a 9.7% operating margin and 12% return on assets over the last four quarters, Urban Outfitters runs a tight ship. The trailing cash conversion cycle has hovered near the 40-day mark for several years, and is among the sector's strongest efficiency readings. Fiscal responsibility over many years also resulted in a squeaky-clean balance sheet with $520 million of cash equivalents and zero long-term debt.
All that being said, fashion is a notoriously trend-sensitive industry, and even a well-run company can miss out on large swings in consumer tastes. Urban Outfitters has had some pain on that front over the last couple of years, including a weak shopper response to its products in women's fashion in the second quarter. But the company is fighting back with a successful customer rewards program, expanded e-commerce initiatives in several international markets, and a strong start to the third quarter driven by a successful back-to-school campaign.
In short, we're looking at a well-run company that responds appropriately to changes in the market. Even in difficult market conditions, Urban Outfitters posts strong profits and sector-leading efficiency metrics. And in case of absolute disaster, this company could ride out a long and painful storm on that mint-condition balance sheet.
Yet investors value Urban Outfitters like a struggling chain on the brink of bankruptcy; that's a big mistake. I see Urban Outfitters as a fantastic buy today.
Time to make another deposit
Moreover, Axos has resoundingly answered questions about its ability to deliver growth with a strong yes. Axos reported double-digit growth in the second quarter across all of its most important metrics. Assets, book value per share, interest and non-interest income, and earnings per share all increased by at least 14% in the quarter.
Since then, its stock price has fallen more than 11%. However, it's worth noting that much of the sell-off is related to concerns about the prospects for banks as a whole:
As you can see, both regional and big banks, as measured by the SPDR S&P Regional Banking ETF and SPDR S&P Bank ETF respectively, have fallen sharply over the past month. That reflects the market's fears of interest-rate uncertainty, as well as ongoing global macroeconomic turmoil that could pull the U.S. and much of the world into recession.
Sure, recession is a possibility. Heck, I'd go as far as to say that recession isn't just possible, it's inevitable, and people do need to prepare for the next recession. The thing is, to invest in stocks for the long term and generate long-term wealth, you need to ride out market downturns, and not get caught up in the mistake of trying to time your way around the next crash.
Right now, Axos trades for less than 8.5 times 2019 earnings estimates. That's crazy-cheap for a company that's generated double-digit earnings growth for years, and that has the capacity to grow earnings at double-digit rates for many more years to come. Even if we see a recession in the next year or so, investors who buy Axos at today's valuation, and hold for the long term, could find themselves very glad they did.