It Pays to Be Different

Buy a retail stock at the right time, and you can generate impressive returns.

What's the right time, you ask? I hate to say it, but it's not when things are going well. To be invested when stocks move up, we have to buy in when they are down. But prices can move quickly -- both up and down -- and there's enough sales and profit performance data out there to make investors giddy with excitement or replete with disappointment.

Fortunately, our community intelligence wonder tool, Motley Fool CAPS, can be a big help. That's because we can track investor sentiment via the ratings. And sometimes, if we are careful, we can play the role of contrarian and scoop up good bargains when others may be looking the wrong way. That's why one-star stocks, those with the lowest rating and the least amount of love, can be a good source of ideas.

Things that make you go hmmm
To learn more, let's examine some current one-star stocks and their returns over a one-year time period.

You can teach an old dog new tricks
I will fully admit that Big Dog Holdings' namesake business is in decline. The brand has lost some of the little cachet it had, and the company is closing stores in response and not reinvesting in the brand. The bears recognize this and have let their thoughts be known.

What I think many investors are missing is that capital is being diverted to revitalizing The Walking Company. This is a retail business that has had its own ups and down, including bankruptcy. Where the shorts and the bears see trouble and uncertainty, for the past 12 months the market has seen opportunity and shares have risen accordingly.

The boys are back in town
Auto-parts retailer Pep Boys has been having all kinds of trouble. Sales growth just isn't there, and neither is consistency in profit growth. Perhaps the brothers are having too many squabbles at the dinner table.

However, in the past year, some very interested parties -- two activist shareholders -- have started making their voices heard and pushing for a turnaround in performance. While the turnaround is probably still early, when shareholders who own a combined 18.6% of shares outstanding start making noise, the market clearly listens.

Who's watching?
I wonder whether Whole Foods (NASDAQ:WFMI) checked out Wild Oats' CAPS rating before making its offer. After all, with so much negative sentiment, it could make a case that the price was low relative to what Whole Foods planned to do following its purchase. It may be wishful thinking, but you never know who might be lurking in CAPS.

Tough to call
While we have just seen a few examples of when betting against the sentiment can pay off, it's not going to happen every time, and I would be remiss to try selling you a line. I find two retailers in the list too tough to call at their current prices.

It's no mystery that I am a fan of Build-a-Bear workshops. I love the concept. I love the store layout. And I think the performance so far has been pretty impressive. I don't buy that this is a fad, since the teddy bear is a pretty timeless item and there will always be kids needing a stuffed friend to snuggle with at night.

There are lots of challenges going forward, especially as the little ones get older. One challenge is from the newest member of our family, our Webkinz horse, Ilahee. Now my 10-year-old has a stuffed animal that comes with a social network. Get to the drawing board, Build-a-Bear.

Gap is another one that's tough to consider at today's prices. The story has already been told so many times that we won't go into it. But I just don't know whether Gap can get back to where it was without a major shake-up, like splitting the company up for instance.

An opportunity in the making?
We've come to the last one on the list, the fallen angel with that big decline next to its name. Circuit City has already made a big turnaround since early 2003, when shares hit their lowest point. But the recent price war on the latest technology -- plasma, flat-panel, and high-definition televisions -- recently got the better of it. Couple that with a personnel decision that could backfire in the future and you've got the perfect storm of pessimism surrounding the stock.

But as I said above, one key to generating returns in retailing is to buy when things look bleak. That's the way you get the best prices. So now is the time to see whether Circuit City has what it take to turn things around yet again.

The Foolish bottom line
Good value investors know when to bet against the crowd. It's both an art and a science. Fortunately, CAPS can help with both aspects by giving you access to what other investors are thinking. I don't have to tell you that that is valuable information and a way to get paid by being different. Click here to sign up. It's free to do so.

For more on the one-star retailer to watch, check out:

• Second Could Work at Circuit City
• Circuit City Tunes Up Again
• Circuit City Cuts Costs, Corners

Whole Foods is a Motley Fool Stock Advisor selection. To learn more about the Foolish newsletter that outperforms the market by the largest margin, simply sign up today for your free 30-day trial. Gap is both an Inside Value and a Stock Advisor selection.

Retail editor and Inside Value team member David Meier loves a good bargain and is ranked 1,241 out of more than 28,000 rated players in CAPS. He does not own shares of any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.