3 Beat Up Apparel Stocks That Could Bounce This Holiday Season

Wednesday, November 5, 2014 - 1:30pm

by Eric Winter

Brace yourselves -- the busiest retail season of the year is almost upon us.  

Many economists have high hopes for consumer activity during the upcoming holidays and for good reason. Three big factors are making a good argument for increased spending in the fourth quarter:

1.    More jobs: September’s unemployment rate of 5.9% is just a few clicks off from what is considered full employment. The American work force has gained two million jobs this year.

2.    Higher confidence: Consumer confidence, which puts a number to how optimistic people feel about the overall state of the economy, is at its highest point in seven years.

3.    Lower gas prices: Oil prices have fallen to two-year lows, bringing gas prices down with them. Those savings mean income is free to move elsewhere (i.e. into retail).  Analysts expect even more drops to come soon too.  

Thinking that the perfect storm is brewing for consumer spending, I set out a few days ago to see if I could uncover a few beat-up apparel stocks that could benefit from a bounce this holiday season.

I started with a few basic criteria, whittling down my universe to stocks that are trading near yearly lows while still maintaining low short interest

I didn’t want any companies operating in the red, so I looked for positive earnings in the form of a price-to-earnings ratio above zero.  

Finally, I wanted analysts to still believe in these stocks, so optimistic price targets had to be present. Significant institutional buying didn’t hurt, either.  

I was left with three ubiquitous apparel names -- all of which have a fighting chance to spread some holiday cheer to investors in the coming months.

Ascena Retail Group, Inc. (Nasdaq: ASNA)
You may have never heard specifically of Ascena Retail Group.  However, you’d likely recognize the brand names of their 3,800 stores in the United States and Canada. Lane Bryant, Maurices and three other clothing retailers operate under the group’s value-focused umbrella.   

ASNA stock has lost more than 41% this year, with a hefty portion of that drop coming in September after a poor earnings announcement. Guidance remains soft, so the allure here mostly comes from cyclicality.  
Despite a number of downgrades after earnings, the stock still holds a mean analyst price target of $17.10. That’s 37% from where it sits now. ASNA has lowered expectations, but if it can beat those weakened numbers due to great holiday traffic, that gap could close quickly.

The Gap, Inc. (NYSE: GPS)
The Gap has lost some of its footing this year as well. The stock tumbled 12% in early October when CEO Glenn Murphy announced he’ll be stepping down, causing a few downgrades to roll in afterwards.

I see that large drop as overly emotional and not grounded in fundamental value, and investors seem to agree. The stock has recovered slightly since then and has the momentum from a $500 million stock buyback supporting it as well -- that’s on top of $1 billion already approved. 

Gap recently announced it will be adding 63,000 seasonal workers in anticipation of the holidays. Essentially, GPS is tacking on 50% to its current workforce to meet perceived demand. 

Another vote of confidence comes from the portfolio of Lone Pine Capital, which owns more than $800 million of GPS stock. The billionaire founder of the firm, Stephen Mandel, Jr., has a history of a good stock-picking, making him one of the top earning fund managers last year.      

Urban Outfitters, Inc. (Nasdaq: URBN)
Specialty retailer URBN joins our list of depressed apparel brands, plagued by weaker same store sales year over year. After warning that third quarter numbers may be lackluster in mid-October, the stock fell 12% in one day.

However, a boost may come this shopping season, as holiday sales are expected to increase by 4.1%, according to the National Retail Forecast. URBN is in a unique position versus GPS and ASNA to benefit from this due to their diversified offerings. URBN’s brands and product lines span apparel, furniture, gifts and novelty items, getting a wider variety of shoppers in its doors.   

URBN has also seen one of its segments flourish, specifically the Free People brand. The apparel line is registering double-digit growth numbers, giving investors hope for the future.  

Risks To Consider: I can’t predict with total confidence how this year’s consumers spending will turn out, so keep in mind that these picks are touch and go. Investors are finicky; even if the upcoming quarter’s numbers turn out well, the stocks may head south if they don’t best last year.

Action To Take --> Savings at the pump, lower unemployment and higher confidence should contribute to good foot traffic this shopping season. Shorter-term investors considering buying these names now might want to exit before earnings, hopefully riding up the holiday shopping wave before good or bad news hits. GPS is my pick for the long-term, with ASNA and URBN being more speculative.    

These three stocks are out of favor, but if you want a list of companies with long-term growth prospects, then check out Top 10 Stocks. We recently compiled a list of the 10 best stocks to own forever -- we call them "Forever Stocks." These are companies with a strong foundation, wide moat and robust growth potential. For more information about this group of elite companies, click here.

Photo courtesy of Brett VA via flickr.

Eric Winter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.