The One Retailer Stock to Buy

You, my friend, are no better than a monkey. Since the low point in early March, the market has risen some 60%, lifting the tide of all boats. While low-quality stocks fueled the early stages of the rally, just about any monkey could have hit a winner on the dartboard since then. So don't pat yourself too heartily on the back for the gains that your portfolio's realized. The tide came in, and everyone's boat is floating.

A slippery banana peel
The trick now is to see which companies deserve to stay in your portfolio and which ones you should throw overboard before they make you into a monkey's uncle.

Clothing retailers might not have been the top performing industry over the past year (that would be precious metals), but they haven't been a slouch either. The Dow Jones U.S. Apparel Retailers Index is up more than 115%, making it one of the market's top 10 performers.

But that's a curious position for them to be in considering industry numbers don't really support their valuations, even if you argue that they were extremely undervalued beforehand.

Some of the top leaders have been Guess? (NYSE:GES), Pacific Sunwear, and Urban Outfitters (NASDAQ:URBN), with some of the worst merely doubling in value, but the teen clothing segment still doesn't look all that healthy.

Ready for a dressing down
Unemployment for this demographic is still raging well ahead of the national averages, at 27.6%, compared to 10.2% for the entire country. Same-store sales figures have shown spotty trends at best, with October's numbers suggesting that the coming holiday season won't be bringing much cheer. True, the month is sandwiched between the back-to-school sales and the impending launch of the Christmas season, but comps haven't been inspiring much confidence before now either. We could be entering another period of holiday hell.

Below are some top teen retailers showing their valuations compared to how well they're moving their clothes off the racks.

Source: Capital IQ, a division of Standard & Poor's. *Free cash flow til the July/August quarter.

The kids are not all right
It's been a dismal enough showing that even Abercrombie finally abandoned its no-discount policy in August. Even if the cool-kids retailer's valuation based on free cash flow suggests it isn't as expensive as an earnings-based one does, management's refusal to move off the dime till very late in the game is a mark against it.

But valuation concerns take out a number of these retailers from consideration as their run ups have put them into dangerously overbought territory. So which one should you fill up your shopping cart with?

How about the proven winner?
That would be Buckle. As one of the few retailers consistently posting positive comps and with comparatively few stores, Buckle has plenty of room to grow further. The conservatism it's shown so far has served it well as it has steadily increased its sales per square foot at an 8% growth rate since 2003 at the same time that gross and operating margins have grown. Revenue growth has picked up steam in the period, while the company has managed to lower the time it takes to turn inventory into cash.

The market is undervaluing its stock, and even based on cash flows, it is not all that expensive, particularly in light of analysts' expectations for it to grow profit at 11% per annum.

What's it mean to you?
My Foolish colleague Alyce Lomax has come up with more than a few reasons over the past few years to love the rather hidden retailer (it has just over 400 stores), even if she also played Devil's advocate to come up with some reasons to hate it. The reasons to buy far outweigh those stacked against it.

With the market at some heady levels, you're better off buckling your belt and going with top-notch retailers like Buckle. It could save you from any monkey business that is yet to come this holiday season.