Value-Conscious Investors Shopping For Retailer Stocks Lagging Sector May Offer Holiday-Season Bargains

Heading into the prime holiday shopping season, some Wall Street investors say they are tempted to hunt for bargains among depressed retailing stocks.

Few industries have fared much worse than the retail group in the stock market’s powerful rally of the past year.

While the Dow Jones industrial average climbed more than 1,100 points since last November, shares of many operators of general merchandise and specialty stores have gone nowhere or even lost ground.

In the 12 months through Oct. 20, Dow Jones’s specialty retail group fell more than 10 percent, ranking No. 92 among 96 industry groups tracked by the publishing concern.

Over the same span, broad-line retailers edged up a little more than 1.5 percent and apparel retailers eked out a 3.76 percent gain, to stand 85th and 84th.

All this has attracted the attention of value-conscious investors like Gail Bardin, a portfolio manager at the $150 million Hotchkis and Wiley Equity Income Fund in Los Angeles.

“We find there is always something good out there to buy that’s out of favor,” she says. “Right now it’s the autos and the retailers.”

Bardin acknowledges there is plenty of negative news in the industry right now. A major national retailer, Kmart, is struggling under new management to recover from a series of earnings disappointments, while three Northeastern discounters, Bradlees, Caldor and Jamesway, are operating under Chapter 11 federal bankruptcy protection.

Kmart stock has lately traded between 9 and 10, less than half where it stood as recently as last year. Caldor has tumbled from above 30 to less than 5, Bradlees from above 15 to below 2.

Jamesway, which is in bankruptcy for the second time, has fallen from a high of 4 down to 1/16.

The giant of the industry, Wal-Mart, at a recent price of about 22 is down 50 percent from its peak, and is trading right about where it stood four years ago.

The retailing industry’s woes are well known on Wall Street. The ‘80s, with their free-spending reputation, have given way to a much stingier climate for consumer spending in the 1990s.

Today’s customers won’t buy unless they think they’re getting a real value. Women, in particular, seem to have put their clothes budgets on a permanent austerity regimen.

The glamor purchase of the ‘90s is often not a luxury car or a suite of furniture, but a graduate-school tuition payment or shares of a top-performing mutual fund.

In this climate, expectations for retail business in the all-important weeks leading up to Christmas are very modest this year.

Based on the trends in evidence in September, “many of the retailers that are seeing better seasonal sales are doing it with more promotional dollars, applying additional pressure to gross margins,” says Gary Balter, an analyst who follows the industry at Donaldson, Lufkin & Jenrette Securities Corp.

With all this, however, investors like Barden see little likelihood that the American consumer will go into indefinite hibernation. In the meantime, she says, income-conscious investors may be attracted to the dividend at a stock like J.C. Penney, which recently sported a yield of 4.4 percent.

“The strong will survive,” she observes.

Other analysts emphasize a similar theme, suggesting that investors who want to bargain-hunt in the retail stocks concentrate on sorting out which ones are likely to emerge healthiest on the other side of the current slump.

“In this difficult and competitive environment,” says Balter, “investors should return to safer, even if higher-multiple, growth stocks and to those cyclicals that will outperform based on internal changes.

“Focus on companies with gains in market share, comparable-store sales, sales productivity, return on new investment and growth rate.”