Many retailers look cheap right now, with some trading at low-double-digit P/E multiples. But with stagnating economic growth and a tightfisted, ham-handed Congress doing little to help the economy, is now the time to buy retail stocks? After all, if earnings decline, those low P/E ratios are illusory.
I asked three Fool.com analysts what retail stock they liked best right now (if any) and then posed another question: Which retailer do you need to avoid?
Here's what they said:
Rick Munarriz, Fool.com contributor
I'm not a fan of P/E, and it has nothing to do with the way I looked in gym shorts back in high school.
Let's take two retailers. Video game specialist GameStop
Which stock is cheaper?
This isn't really a trick question. I fully expect value investors to gravitate to GameStop as they shield their eyes from the lofty multiples that lululemon is commanding. However, I am not a value investor. I need growth in my diet, and in GameStop I see nothing more than a small-box tenant in a strip mall that will fade in relevance as digital delivery transforms the gaming industry.
I see more than $100 yoga pants at lululemon. Its latest quarter was a stunner, with sales and earnings soaring 35% and 70%, respectively. There aren't too many apparel retailers clocking in with net margins of 18% out there. Good luck finding a company that has been posting double-digit spikes in comps and trouncing Wall Street estimates since the recession began to ease last year.
Shoppers can be fickle, so it will be important to keep an eye on lululemon. The moment well-to-do soccer moms begin shopping elsewhere, investors will need to follow suit. However, its prospects -- even at its seemingly rich valuation -- are better than a company trying to sell new and used games and gear to teens who will be even more fickle when technology moves them along.
Alyce Lomax, Fool.com contributor
Still, investors should beware for a few reasons. Wal-Mart's still struggling here in the U.S. Many of its core customers are living paycheck to paycheck amid price inflation. It's so desperate to drum up customer traffic it recently embarked on a gas price war. For a while, it even looked like it was losing sight of its price-cutting advantage. Bottom line: Wal-Mart's been faltering in an environment it should have been able to dominate, so look out below.
Rich Smith, Fool.com contributor
I've been negative on hhgregg
I'm still not one of those people. When I look at hhgregg, I see a company that after years of generating free cash flow, turned into a net-cash-burner over the past four quarters. That's not a company I want to own.
Whom do I prefer? Ascena Retail
Foolish bottom line
So there you have three Fools' opinions on retail. Do you have another great play in this sector? Let us know in the comments section below.
Jim Royal, Ph.D., does not own shares of any company mentioned here. The Motley Fool owns shares of GameStop, Wal-Mart, lululemon athletica, Best Buy, and Costco. Motley Fool newsletter services have recommended buying shares of Wal-Mart, hhgregg, lululemon athletica, Costco, and Best Buy. Motley Fool newsletter services have recommended writing covered calls in GameStop. Motley Fool newsletter services formerly recommended Best Buy. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. 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.