High-Flying Retailer Could Gain More

03/23/2010 11:04 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says women’s clothing retailer Ann Taylor’s stock just keeps going up, despite lots of pessimism.

Ann Taylor Stores (NYSE: ANN) [recently] reported a profit as "sales showed signs of stabilizing," noted a March 12th article in Barrons.com ("Will Ann Taylor Turn Raggedy?”)

The shares slipped following the report, and the author believes that there is more downside in the works for ANN, citing valuation and the lack of a blowout quarter.

Given the stock's more than 530% gain during the prior 12 months, ANN now trades at 27.5x forward earnings, the article states. For comparison, the author notes that Chico's FAS (NYSE: CHS), Nordstrom (NYSE: JWN), and J.Crew Group (NYSE: JCG) all trade with forward P/E ratios in the mid-teens. What's more, the Street is anticipating that [Ann Taylor’s] revenue will shrink year over year in 2011.

Analysts agree with this dour outlook, with Wedbush Morgan noting that "the company is in the early stages of a comp and margin recovery," making its 530% gain difficult to justify. Furthermore, Wall Street Strategies analyst Brian Sozzi believes that Ann Taylor may have pricing problems when it returns "to full-price business longer term." Sozzi also takes issue with ANN's recent run-up, calling it "the richest multiples...within our specialty apparel sector coverage."

[But] while analysts debated whether ANN shares were overvalued or not, the stock soared to an impressive year-over-year gain. What's more, the shares are poised to continue this rally, as there is plenty of sideline money that could be brought to bear on ANN.

For instance, more than 20% of the stock's total float is currently sold short. Should ANN continue to defy analysts' forecasts for a decline, these bears could decide to cut their losses, resulting in a potential tailwind of buying pressure for the shares.

In the options pits, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.85 ranks in the 39th percentile of its annual range. This ratio could be headed lower, as data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) indicate that calls bought to open during the prior two weeks have more than quadrupled puts purchased. One has to wonder, however, if the recent surge in call buying is related to bullish speculation or nervous short sellers hedging their positions.

Finally, analysts have currently doled out 11 Hold or worse ratings, compared to just five Buys. What's more, Thomson Reuters reports that the average 12-month price target for ANN rests at $18.19 per share—a discount to the stock's [recent close around $20]. If these naysayers begin to tire of betting against this rising stock, the resulting upgrades or price-target increases could provide additional buying pressure for ANN shares.

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