Comments on: Analyzing Stock Valuations During Recessions

By: Abercrombie Chooses Fewer, More Profitable Sales Over Lower Margin Bargain Bins | The Peridot Capitalist

Fri, 12 Dec 2008 19:15:06 +0000

[...] month I mentioned I thought Abercrombie and Fitch (ANF) stock looked undervalued. A December 8th Wall Street Journal article entitled “Abercrombie Fights Discount Tide” [...]

By: umoo.com

umoo.com — Mon, 24 Nov 2008 17:51:00 +0000

The nature of analyzing stock values is changing and becoming more technologically based. Although computer models have greatly assisted investors in making wise decisions, it has also caused problems for many. For instance, unregulated modelng often causes undisciplined, high-risk investments, which is the opposite of the technology’s purpose. Technology is very useful and of great assistance to many, but we must be careful to not let it overrule our rationale.

By: Chad Brand

Chad Brand — Mon, 17 Nov 2008 23:48:00 +0000

Dan,
First off, even if your comment was not a criticism, don't worry about criticizing something I write. If it warrants it, go right ahead. Unless it's not in good taste (some people can go over the top), you don't have to worry about disagreeing with me on this blog.

I agree that there are some very good candidates other than ANF. The reasons I picked that one was because of their strong brand (a loyal customer base will likely stick with them long term), high margins (plenty of room for contraction without bleeding red ink), a great balance sheet ($5 per share net cash), and the dividend yield (4%), just to name a few. I do not doubt that other retailers fit many, if not all, of those criteria (there are tons of great long time buys in the consumer discretionary sector right now if one is willing to be patient).

As for the timing, I agree that 2009 is going to be ugly for retailers. I don't try to pick bottoms though. Some people like to wait to see signs of a turn, but since stocks are leading indicators, they'll turn before the business does. If I feel like the price is cheap and has quite a large margin of safety, I'd rather pounce too early and average down than avoid the situation completely. It really depends on one's overall strategy though.

By: Dan

Dan — Mon, 17 Nov 2008 22:11:00 +0000

While I agree that retailers and Abercrombie in particular are being priced at tremendous discounts currently, I'm a little bit curious as to your choice of Abercrombie over a host of other very strong candidates.

In retail alone, The Buckle and Urban Outfitters, two best in class retailers who have had SSS hold up even in the early throes of this recession are trading at PEs which would allow you essentially "buy growth for free."

J. Crew, which courts a similar price point as Abercrombie, is trading at nearly equivalent valuations to ANF despite the fact that ANF is considerably more saturated on a square footage basis and likely later on its SSS Tenement Curve.

In a market where value seemingly abounds, why retail and why ANF in particular? With retail sales likely to decline in coming quarters and maybe throughout 2009, would an investment today necessarily offer better risk-adjusted returns versus other retailers or another pick altogether?

(P.S. Don't take this as criticism, but rather an attempt at intellectual discourse. I hold J. Crew stock myself and am considering purchasing more as I like the business and think the valuation is likely too good to pass up and because I'm nursing paper losses and probably should average down...)