The Motley Fool: The GAP is priced to fit right

The Motley Fool Take

If you’re seeking a slow and steady grower, try apparel retailer Gap (NYSE: GAP) on for size. With 3,000-plus stores on several continents and a market value recently near $10 billion, its brands include Gap, Banana Republic, Old Navy, Athleta and Intermix. The stock has lost ground over the past year, in part due to shrinking revenue, but that just makes it more attractive to believers.

Gap has been transforming itself over the past decade, drawing more consumers to its brands. It has emphasized its direct-to-consumer sales, and it made the aggressive move in 2012 to go outside the company for executive help, hiring Liz Meltzer, who’d previously been the senior vice president of merchandising at Uniqlo, and Jill Stanton, who was formerly the vice president of global apparel for Nike, and is now the interim president of Old Navy. Much of Old Navy’s positive transformation this decade can be credited to Stanton’s influence.

It remains to be seen whether the Gap and Banana Republic brands can be revived as successfully as Old Navy, but the potential is there. Gap isn’t quite firing on all cylinders yet, but it’s poised to deliver modest long-term growth. With a price-to-earnings (P/E) ratio recently in the single digits, it sports an appealing valuation, too. Better still, the company pays a solid dividend that recently yielded 4.1 percent.

Ask the Fool

Q: Can you explain what a company’s book value is? - D. M., Canton, Ohio

A: An accounting concept, book value suggests a company’s value according to its balance sheet. To calculate it, start with the total assets and then subtract total liabilities and intangible assets, such as goodwill, patents and trademarks.

Book value used to roughly reflect a company’s intrinsic value, as most assets, such as factories and land, were capital-intensive and appeared on the balance sheet. But times have changed. With America’s economy more service-oriented, book value is less relevant for investors.

Consider Facebook. Its book value was recently near $32 billion, far from its market value of $270 billion. Much of its value stems from assets and competitive advantages that don’t register significantly on the balance sheet: intellectual property, employees, a strong brand and a massive network of customers worldwide. Its promising future isn’t reflected in its book value, either. (The Motley Fool has recommended and owns shares of Facebook.)

Next imagine a company that owns many buildings. Over the years, their value on the balance sheet is depreciated, eventually to zero. They’re not really worth zero, though, and they can even appreciate over time. This company can also be worth much more than its book value.

With many companies, you’d do well to largely ignore book value.

Q: What’s “profit-taking”? - W.A., Ravenel, South Carolina

A: It’s what happens when some investors sell their shares of a stock after it has risen considerably, perhaps wanting to move the proceeds into some other investments. If many investors sell their shares, this will have the effect of depressing the stock’s price for a while. That’s why you might sometimes hear that a certain stock is down due to profit-taking.

My Dumbest Investment

Back in the 1990s, I was a nervous new investor, so I sought the advice of a local broker. He recommended investing in the IPO of Golden Books, as it had been around a long time and was now putting its books on VHS tapes. He added that it was a great time to get in on the ground floor. Excited, I spent much of my available money on shares of Golden Books Family Entertainment.

Two weeks later, the Golden Books stock price was down 50 percent or so. I called the broker and he said to hold on, because new stocks are volatile and it was coming back. I held on another two weeks just to see it get cut in half again. Upset at that point, I called him back only to find out he no longer worked there. Over time I lost everything in Golden Books. I remembered an old saying: “A broker will only make you broker.” - Dennis, online

The Fool responds: Some brokers can serve you very well, but not all are smart, skilled or looking out for your best interests. It’s usually best to steer clear of initial public offerings (IPOs) for a year or so, as average investors rarely get to buy the shares at their relatively low initial price. They end up buying at higher prices and many times end up underwater a few months later.