Death of Retail Is Greatly Exaggerated

 | Mar 14, 2014 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

rost

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bbby

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psmt

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cost

The struggle of brick-and-mortar stores have with online shopping has been told many times. But people still buy in stores, and not all retailers are struggling. In fact, retail sales for February 2014 rose 0.3%, a bit more than the 0.2% gain analysts had expected.

To choose stocks, I use automated strategies I based on the way well known Wall Street investors decide where to place their money. Three retailers today are earning high grades from these strategies and are worth paying attention to.

One of them is Ross Stores (ROST), operator of 1,146 locations in 33 states. These are off-price apparel and home fashion stores operated under the Ross Dress for Less moniker. The strategy I based on the thinking of Warren Buffett favors Ross. It likes: the company's strong brand name and dominant position in its market, earnings per share which have increased in nine out of the past 10 years, a very small debt load, and a high return on equity (32.3% vs. the strategy's 12% minimum). In addition, this strategy projects 10 years out how much the investor can expect to earn on an annual compound rate. The strategy likes to see this at 15% or higher, and Ross's expected rate of return is a solid 16.2%.

Bed Bath & Beyond (BBBY) operates more than 1,400 stores under the names of Bed Bath & Beyond, Christmas Tree Shops, Cost Plus World Market and others. The strategy I modeled after Peter Lynch's investment approach is a fan of this company. The strategy focuses on the price-to-earnings-to-growth ratio, which is price-to-earnings relative to growth and is a measure of how much the investor is paying for growth. A P/E/G of up to 1.0 is acceptable (that's where you are paying $1 for every 1 percentage point increase in growth). Bed Bath & Beyond is well below this threshold, sporting a very desirable P/E/G of 0.60. Another big plus: zero debt.

PriceSmart (PSMT) operates 32 membership warehouse-type stores in Central America and the Caribbean. It was founded by Sol and Robert Price, founders of the first U.S. membership warehouse store concept, The Price Club (which was eventually purchased by Costco (COST)). PriceSmart is favored by my James P. O'Shaughnessy-based strategy. It likes the company's market cap ($3.3 billion), earnings P/E share which have increased in each of the past five years, and a price-to-sales ratio of 1.38, which is below the 1.50 maximum allowed. Those companies that pass these three tests are then ranked by their relative strength (a measure of how well a stock has performed in the last year compared to the overall market). Companies in the top 50 get this strategy's highest grade. PriceSmart, with a relative strength of 74, is in this top-50 group.

Do not believe everything you read about the death of retail stores. All three of these companies are leaders in their markets, have proven management teams and have well priced stocks. Many retailers are alive and well, including these three high performers.

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