Small-cap Values in Retail

11/20/2015 10:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

Shopping for value? Turnaround expert George Putnam looks at the small-cap value universe. Here, the editor of The Turnaround Letter, looks at a trio of underperforming small-cap retail names that might be poised for better times ahead.

Steve Halpern: Our guest today is George Putnam, the advisory industries leading authority on turn around stocks and editor of the aptly named The Turnaround Letter. How are you doing today, George?

George Putnam: Fine thanks, Steve.

Steve Halpern: Thank you for joining us. Your latest research report focuses on small-cap value stocks. Could you explain why you view this area as a place to potentially find opportunities today?

George Putnam: Sure. There has been a lot of research over the years that shows that small-cap value stocks over the long-term significantly out-perform other areas but in the most recent periods, large cap has done better than small cap and the growth stocks have done better than the value stocks.

So that sort of puts small-cap value in the way-out-of-favor category. Of course, that's where we always like to look for things because we think small-cap value stocks will eventually move back into their leadership role of higher returns.

Steve Halpern: Because your view is long-term, you're comfortable moving into an area that is out of favor correct?

George Putnam: Sure. I meant that you won't make much money over the long-term chasing the hottest area because it will go cold, but if you are willing to be patient and go into an area that may be sort of cold right now it will heat up and then you will do very well.

Steve Halpern: Turning to your latest report, you began with the universe of small-cap value stocks and then look for some of the biggest losers over the past two years. Interestingly, three of the stocks that you zeroed in on were retailers. Is it unusual for several stocks within one category to all be in this under-performing category or is that typically what you would see?

George Putnam: It's not necessarily that unusual. We actually screened out all of the energy stocks because the energy area has been hit so badly and retailing has struggled a bit.

With the advent of the internet and Amazon (AMZN) and other large internet retailers dominating the space it has hurt on some of the older bricks and mortar stores .

But we actually thought that the smaller ones, the small-cap ones were interesting because they don't have the huge footprint and the huge investment that some of the bigger store chains have.  

Steve Halpern: Let's turn to some individual names and one that stood out in your report is Abercrombie and Fitch (ANF), which has lost its status as a market favorite. What happened and what's your outlook from here?

George Putnam: Well, all of the kind of teen fashion brands come in and out of favor and they probably stuck with their concepts a little bit too long. They had a very kind of sexy focus to their advertising which kind of wore thin and so they are revamping.  

They brought in a lot of new management. They are still looking for a new CEO. They are closing stores. The early results look promising. Losses have narrowed quite a lot and again fashion is a very fickle area but it looks like they may be cutting back into their good swing again.

Steve Halpern: Now, I'm sure all of our listeners are familiar with Sears, but most are likely unfamiliar with Sears Hometown and Outlet Stores (SHOS). What is this company and what its relationship with larger Sears Holding (SHLD)?

George Putnam: Well, Sears Hometown and Outlet got spun out of Sears a few years ago. Sears, the big Sears has been having very serious problems and they have been-to try to keep the stock price up and to get value to their shareholders-spinning out different concepts and different pieces of the business.

This is one where in small cities and large towns they have stores that sell appliances, tools, other basic products and also outlet stores where they sell things at substantially lower prices. The business has actually been hurt a little bit by their affiliation with Sears.  

I think the Sears brand is very damaged and the former parent has put some restrictions on Sears Hometown on what they can and can't sell and how much they can charge and things like that.

The business in Sears Hometown is currently okay but not great. I actually think that we may see the big Sears disappear and that would be a good thing for this spinout.

Steve Halpern: Now, a third company that likely flies under the radar to most investors is called Stage Stores (SSI). Can you share some background on this situation?

George Putnam: Sure. Stage Stores has for years focused on small cities and large towns scattered around the country. I mean, their typical location will be in a city of maybe 50,000 people and they get to know their markets and do their marketing very well.

But even they are feeling something of the squeeze from the internet so they've seen their margins narrow which means that they are cutting costs. They are closing down the less-profitable stores. They are taking all the right steps to really get their profits back up again.  

Steve Halpern: You mentioned in your report that there is some value in their real estate as well?

George Putnam: Yes. I think they own a lot of their stores and so they can sell them off if they do close them.

Steve Halpern: Again, our guest is George Putnam of the Turnaround Letter. Thank you so much for your time today.

George Putnam: You are very welcome, Steve.

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