Bargain Stock, Bargain Shopping

02/24/2006 12:00 am EST

Focus:

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

Nancy Zambell is not just thrifty when looking for values in the stock market, but also, as she notes, "exceptionally thrifty when buying clothes." Here, she looks at a firm that sells discount clothes and its stock, selling at a bargain price.

"My marathon clothes shopping trips almost always end up at Stein Mart (SMRT NASDAQ), a Jacksonville, Fla., retailer that’s known for its quality clothing at heavily discounted prices. I've long liked the company, but have steered away from its shares. I’ve felt they were overvalued for some time.

"Like the shares of most retail businesses, Stein Mart's stock price is fairly volatile, as retailers live and die by their same-store sales forecasts, and big institutions move rapidly in and out of the shares based on those estimates. However, we can't ignore this company and its stock any longer. Its shares are currently undervalued and are due for nice appreciation.

"Stein Mart is a leader in the discount retail arena, operating more than 250 stores across the country. Few retailers have been in business for nearly a century. But Stein Mart, a true survivor, has been in operation since 1908. It sells moderately priced designer clothing lines, home accessories, and gift items. Its stores move their merchandise quickly, offering shoppers two advantages: lots of new products and fabulous sales.

"For the investor, Stein Mart's shares are trading close to their 52-week low of 16.25. That amounts to a price-to-earnings ratio of 14.6, which is favorable compared to the industry's 20.7. The shares began their decline last fall, as forecasts for December same-store sales (the amount of growth or loss in sales, on average, per store location) became lackluster. Then, January 2006 same-store sales also fell. However, they declined by only 0.4%, while Wall Street analysts were expecting a much larger 5.8% decline.

"Following this meager drop, Stein Mart's management announced a three-cent boost to its fourth quarter profit expectations (due to be reported March 16) to 39 cents a share. The result: The shares are ready for a boomerang. Institutions are flowing back into the shares, increasing their recent purchases by 3.5%. Yet just 58% of the shares are currently held by institutions. That won't last long. The time to enter your purchase orders is now before the institutions start piling back in and ramping up the price. Along the way, you’ll collect a dividend, yielding 1.4%. Buy up to 19."

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