Finding a Retail Niche

 | Jul 26, 2013 | 11:00 AM EDT
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The economy has been the subject of much debate the last few years, with some saying it is making a recovery and others claiming it is mired in a slow-growth mode that is not producing jobs fast enough.

No matter where one stands on the economic spectrum, what is not in dispute is the importance of consumer spending, which can account for upwards of 70% of the economy. One place consumer spending shows its power is in the retail sector. Earlier this month, the Commerce Department reported that overall retail spending rose 0.4% in June. But excluding autos, gasoline and building supplies, which tend to be volatile, retail sales rose just 0.15%. This performance was below the expectations of economists. In other words, retailers are struggling.

But as with most things in life, one can find shades of gray between the white and black of good and bad performance. Some retailers are doing quite well, and you can give your investment portfolio a solid shot in the arm by including either of the two retailers.

One is Aaron's (AAN), which sells or leases to sell such products as televisions, computers, furniture and appliances. It operates in 48 states and Canada and has been in business for nearly 60 years. It's a leader in its market niche, which is one reason to consider investing in it.

Another reason is that my Peter Lynch-based strategy rates Aaron's very highly. This and other strategies I use to choose stocks are based on the writings of some of Wall Street's smartest investors. I took their approaches to investing, computerized them so I can instantly analyze any stock based on these various strategies. The Lynch strategy focuses on the P/E/G ratio, which is price to earnings relative to growth, and is a way to gauge how much the investor is paying for growth. The maximum P/E/G allowed is 1.0, and Aaron's is well below this threshold, with a yield-adjusted P/E/G of 0.74. Also in its favor is a modest amount of debt.

Another niche retailer worth considering is Conns (CONN), also a Lynch favorite. Conns is a specialty retailer with 70 locations in Texas, Louisiana, Oklahoma, New Mexico and Arizona. It dates back more than 120 years and is well established in its home state of Texas, while taking advantage of promising new markets in Arizona and New Mexico. It sells home appliances, consumer electronics, cameras and furniture, and provides credit for its customers. The company's history, record and expansion opportunities are all reason to consider its stock. The reason the Lynch likes Conns: its P/E/G is 0.91, making it a good buy in terms of its growth.

Both Aaron's and Conns are well established in their markets, with proven records over long periods. Some retailers may be struggling, but these two are strong and performing well.

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