A Hot New Fashion Retailer

04/05/2012 8:30 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This stock just listed last year, and the company's approach to selling in this competitive sector is a business-forward as its styles are fashion-forward, writes Mike Cintolo of Cabot Wealth Advisory.

I know that, personally, riding a big winning stock is fun and even thrilling. However, what really gives me joy is recording my portfolio's solid bottom-line performance every month.

That's what this is all about—big winners are nice, but if they're offset by a bunch of small losses, where's the benefit? The goal is to make money, not score a splashy hit that's a Pyrrhic victory in the end. So keep in mind why you're investing in the first place—to make money, hopefully big money, not to crow about a winner or two.

Retail remains one of the strongest sectors in the market, and about the only worry in the group is that there are so many names to consider; you have to make sure you don't get overloaded on one sector because, eventually, there will be shakeouts in every group, and if you have lots of exposure, your portfolio could take an outsized hit.

Still, if you stick with the best stories in the sector and try to get them at opportune entry points, I think there's big money to be made. One newer leader is Francesca's Holdings (FRAN), an operator of 283 women's boutiques around the US. What makes the company different is that each boutique is purposely made to look unique; there's no chain-store feel here.

Also, the firm ships inventory daily, which keeps each store's products fresh...but also keeps them in limited supply, creating an urgency factor among shoppers. But what really impresses us is the store's economics; on average, Francesca's new stores pay back all investment made in less than one year. That means the company can open a slew of new stores without running out of cash.

At the end of January, Francesca's had 283 stores, but plans to open another 76 (a huge 27% jump in the store count) in 2012, and 75 per year after that, up to around 900, which management believes is easily doable. Combined with strong same-store sales (up 14.7% in the most recent quarter), this expansion is producing huge sales (up 40% to 50% per quarter) and earnings (a 46% projected rise in 2012) growth.

The stock broke out around $25 last month, then surged as high as $34 following a well received earnings report. It's extended to the upside here (the 50-day line is down around $26), but dips toward $30 or even a bit below look buyable to me, as long as you keep a stop in the $26 area.

I think the company has great potential, but the trick is buying the stock correctly.

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