08/04/2006 12:00 am EST
"Value investor John Dessauer is going on a shopping spree, finding fundamentally solid companies whose shares—through no fault of their own—have been hammered back to ‘sale’ prices by volatile markets fearing a consumer spending slowdown…
"Abercrombie & Fitch (ANF NYSE) is an example of how we can profit when a retail chain is in trouble and management fights back. The traditional Abercrombie stores were in dire straits when we first bought this stock. Analysts would sharply criticize management on earnings conference calls about the lack of same-store sales growth. Management responded by describing their new concept stores and boldly saying that they ran stores for cash profits, not analyst praise! In 2003, the stock had a hard time getting over $30, even though earnings rose to $2.06 per share.
"Recently, Abercrombie has been delivering on all fronts. Sales at new stores are excellent and earnings are rising. Estimates for this fiscal year are $4.25. Standard & Poor’s rates the stock a five-star Buy. Others are less optimistic. The stock ran up to $74 and has since come back, but $74 only reflected 17 times 2006 estimates. The pullback cut the P/E to just 13, making ANF a bargain. There is a strong stock buyback program, no debt, and plenty of cash to support expansion, dividends, and buybacks. Abercrombie & Fitch is a buy. My 12-month price target is $80.
"Kohl’s (KSS NYSE) sold its credit card business and is using the proceeds to buy back $2 billion in shares over the next two years. Store expansion is strong, especially in Florida. Kohl’s customers tend to benefit from rising higher-end wages. Kohl’s cost cutting and merchandise changes show strong results. Earnings are better than expected, but Wall Street has mixed reviews, mainly based on price. The stock held up well in the market’s recent sinking spell. Trading at 19.7 times this fiscal year’s $3 per share earnings estimate, Kohl’s is richer than most my stocks, but I see Kohl’s continuing to meet or beat expectations, thanks to internal efforts and rising market share. I rate Kohl’s a buy with a 12-month target of $65.
"Dollar General (DG NYSE) has come down sharply, based on first-quarter earnings of $0.15, down from $0.20 last year. Wall Street’s longer-term concerns are high gas prices biting into customer wallets. But Dollar General’s customers are in better financial shape than Wall Street thinks. This will be a tough year for most discounters, but Dollar General is the best of the bunch. A new merchandising executive was hired last December, and changes include more national brands and new store layouts. Dollar General is financially strong and buying back shares. Earnings estimates for this fiscal year are $1.10 a share, up slightly from last year’s $1.08. The stock is trading at less than 50% of sales per share and 13 times depressed earnings. Dollar General is a buy, with a $23 target."