Shopping for Bargains

 | Apr 18, 2013 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

m

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bbby

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jcp

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cat

After more than three months of a continuous rising tide, the market is finally experiencing some volatility. Monday and Wednesday have produced two of worst performances of 2013 for the major indices. Concerns about slowing growth in China continue to hit the commodity complex; copper is at a 52-week low, gold and silver prices have collapsed and the materials and energy sectors have declined significantly.

I have been underweight the consumer discretionary sector this year because I have been waiting to see what negative impacts the payroll tax expiration and various tax hikes would have on consumer spending. Although I still believe those events will provide some headwinds going forward, spending has held up relatively well.

Falling gas prices are starting to offset those negative impacts. In addition, U.S. based retailers do not have to worry about slowing growth in China or deal with the free-falling Japanese yen like some American manufacturers do. For example, Caterpillar (CAT), which is seeing analyst downgrades. Domestic retailers are also spared navigating the abyss that is Europe, which is looking at a "lost decade." Finally, the housing market looks like it in the middle of a sustained recovery that should last several years.

Two of my two favorite retailers continue to be Macy's (M) and Bed Bath & Beyond (BBBY). I am adding to both positions on dips.

Macy's is an efficiently run department store retailer that continues to benefit from the ongoing saga at J.C. Penney (JCP), which continues to leak market share and is rapidly turning into a Harvard Business Review case on how not to transform a retailing company. Macy's recently hit an all-time high but the stock continues to sport an attractive valuation. The shares sell for less than 10x fiscal 2015's expected earnings (the fiscal year ends in February 2015) and they provide a dividend yield of just under 2% (1.8%).

The company consistently under promises and over delivers, is run by a top-notch management team and has beaten quarterly earnings estimates for 12 straight quarters. Macy's is currently renovating its iconic flagship store in New York City, but the company's strategy and execution need no repair. The retailer is well positioned to continue delivering value for shareholders.

Bed Bath & Beyond, a purveyor of linens, kitchen and other home items, is starting to be recognized as a beneficiary of the housing recovery. Jim Cramer, Stephanie Link and others on these pages have pointed this out, as has CNBC on several occasions.

Analysts are starting to jump on the bandwagon as well. Jefferies raised its price target to $76 a share from $72 a share earlier this week. The analyst firm stated that the company has ample "opportunities to drive outperformance on the top line against low expectations." Credit Suisse also raised its price target to $75 from $70 earlier in the month. I believe other analysts will take similar actions in the near future.

The company has a robust balance sheet with approximately $1 billion in net cash on the books and continually buys back stock. Analysts expect this retailer to grow revenues in a 5% to 7% range annually over the next two years and BBBY sports a five-year projected PEG of under 1 (0.98). Finally, the stock has held up well during the two pullbacks this week and is down less than $0.40 a share for the trading week.

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