When the stock market does nothing but go up, it leaves few opportunities for value investors. However, after steadily trending up for several months, markets have lately run into rough weather. In fact, the recent dip has created an attractive buying opportunity for two stocks.
Both these stocks have seen their share prices drop significantly due to the coronavirus pandemic, and they haven't bounced back as strongly as many others have. This, in my view, allows investors to get in on these stocks while they are still cheap.
The stock market may be heading into a crash this week. Image source: Getty images.
Tilly's: The rare retailer that's adding stores
Specialty retailer Tilly's (TLYS +0.68%) was forced to close all of its stores because of the coronavirus pandemic, which subsequently sent its stock lower. It started its most recent quarter with all of its stores closed, and at the moment, has 10 of its stores in the Los Angeles area still shut. Total net sales in the quarter declined 16% from the previous year. However, management noted that sales are starting to recover significantly, and in the most recent week of available data, year-over-year comparable-store sales were flat.
That said, management has been running the company conservatively for years, growing the store base cautiously and maintaining a pristine balance sheet. Even with the setbacks caused by the pandemic, the company still has $111 million in cash on hand. That's almost $3.7 for each of its nearly 30 million shareholders. With the stock trading at a little under $7, more than 50% of its share price is in cash. For investors, that's a floor that the stock price is unlikely to fall below.
While many of its competitors are shrinking their store base, or going bankrupt, Tilly's is growing. It plans to add two locations this year, and at least seven in 2021. The company sees the turmoil in the environment as an opportunity to gain market share. In 2019, retailers closed 9,500 stores, and the coronavirus pandemic is likely going to lead to many more than that in 2020. When the dust settles, and all the liquidation sales are completed, Tilly's will be in a position to capture a portion of that market share vacated by closing stores.
Now trading nearly 50% lower than at the beginning of the year, this could be the right choice for bargain-hunting investors. Should business operations return to near pre-pandemic levels in 2021, then using the trailing three-year average earnings per share of $0.70 translates to an attractive forward price to earnings ratio of 8.8. For a growing retailer, that's a steal.
Image source: Getty Images.
Macy's stock is oversold
Similarly, Macy's (M 4.79%) share price is down 65% year to date, giving investors the chance to buy the retailers' stock at a discount. Once it gets to the other side of the pandemic, Macy's offers investors earnings at a low price.
The company did pull in $25 billion in revenue in each of the last three fiscal years. Admittedly, earnings per share have been declining during that period. To address its challenges, management is taking steps such as closing under performing stores, opening more off-price locations, and expanding its digital capabilities.
In its most recent quarter, comparable store sales were down 34.7% from the previous year due to store closures and people's hesitancy to return to stores once they reopened. However, now that the company has more information on the changes in consumer trends as a result of COVID-19, it has adjusted its inventory to closer align itself with customer demand. CEO Jeff Gennette said during the second-quarter conference call, "For holiday 2020 newness represents nearly 50% of the total gift assortment, led by items in beauty and home."
The company is also shrinking its store base. In February at an investor day presentation, the company indicated that it plans to close 125 of its lowest-performing stores in the next three years. Importantly, when the company owns the store, the sale and closure bring in significant cash infusions. In the last three years, this has resulted in cash inflows of more than $1 billion.
While the company is shrinking its portfolio of poor-performing full-price stores, it is expanding its off-price locations. Consumers are shifting their tastes toward discounted shopping, and Macy's wants to be where the customer is. Retailers such as TJ Maxx and Ross Stores have benefited from this shift in recent years, and even its premium competitor Nordstrom has a higher ratio of off-price to full-price locations than Macy's.
With over $4 billion in available liquidity, including credit lines, Macy's has the wherewithal to make it through the tough times. Meanwhile, its plan for the next few years looks better aligned with consumer demand. As of now, the market doesn't think that the company can execute its plans and reverse the slide in revenue and earnings, as evidenced by the stock price drop and inexpensive valuation. At its current price levels, you can acquire shares of Macy's stock for roughly two times its three-year average trailing earnings per share.
The steps management is taking, such as expanding its discount locations, investing in digital stores, and upgrading brick-and-mortar stores, has proven to work elsewhere. That said, it's easier said than done, and it remains to be seen if the company can execute on the plan. In the meantime, Macy's seems to be a cheap consumer goods stock that is on sale for savvy investors.
