“Discount Aisle” Retailer The Best Investment Opportunity?

opportunityGeorge Leong: The retail sector is hurting at this time from the discounters to the luxury brands, with just a few exceptions. Even the dollar stores are facing slower growth.

Yet with the sector down, it’s time to look at picking up some of the damaged retail stocks as an investment opportunity.

A retailer that I feel has declined to an attractive level as an investment opportunity is small-cap Texas-based Stage Stores, Inc. (NYSE:SSI). A seller of reasonably priced brand and private-label apparel, accessories, cosmetics, and footwear to women, men, and kids, Stage Stores is languishing just above its 52-week low, where I see an investment opportunity.

Stage Stores runs approximately 883 stores that are situated mainly in small and mid-sized towns in 40 states. The stores’ sizes vary, from as small as 5,000 square feet to as large as 54,000 square feet. Small towns comprising fewer than 50,000 people account for 65% of the company’s store locations; mid-sized towns with between 50,000 and 150,000 people account for 18%; and the remaining 17% are found in large cities.

I view Stage Stores as a contrarian investment opportunity, given the stock is down 21.4% over the last 52 weeks versus a 16.26% advance by the S&P 500. The stock price should rally if the company can deliver better, consistent results.

Stage Stores reported higher sequential fiscal sales growth from FY05 to FY08 and FY11 to FY13. Sales growth is estimated to continue into FY14 and FY15.

The company does make money, with profits in nine of the last 10 fiscal years. The growth is estimated to continue into FY14 and FY15.

The stock trades at a reasonable 12.56 times (X) its estimated FY15 earnings per share (EPS) and a price/earnings-to-growth (PEG) ratio of 0.99 based on an estimated five-year annual earnings growth rate of 26.43%, according to Thomson Financial.


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