Retail stocks have underperformed this year as sales figures have come in below expectations. However, Ken Burgess of Systematic Financial Management believes that some of the sector’s most recognizable names now look attractive after recent declines, and he explains why in the November 30 issue of Value Investor Insight.
Ken Burgess’ retail picks are a play on Mr. Market’s irrational behavior as he describes:
“A typical idea for us is the company that has been a strong growth story for years but starts to slow down,disappointing the growth investors who it. It still might be a great business generating tons of cash flow, but the whiff of slower growth can just devastate the share price.”
The retail sector has been the poster child for this kind of market reaction during the past few months, presenting several opportunities. Three such opportunities are Michael Kors (KORS), Abercrombie & Fitch (ANF) and Coach (COH).
See also: Why Apple Is the Best Retail Stock According to this 15 Point Checklist
Retail Stocks: Michael Kors is undervalued
According to Ken Burgess, Michael Kors is the classic case of a company that’s grown rapidly for a number of years, but then growth has slowed and the market has unfairly punished the stock. With Kors’ shares down by 60% from their highs last year, Burgess believes that stock has reached a point when low expectations are now baked into the price.
And Kors seems to be stronger than many of its peers. The company hasn’t (to any great extent) made the big mistakes sellers of apparel, footwear and accessories can make, such as overexpansion and diversification. They haven’t gone too far afield in distribution or become overly promotional, which can deteriorate brand value. The Kors brand is maturing, but its strength is intact.
Kors’ most attractive quality is the company’s free cash flow generation and cash balance. On a normalized basis, free cash flow is estimated to be in the region of $600 million per annum. Kors has $1.3 billion in cash.
