Avoid Retail

 | Nov 29, 2013 | 12:00 PM EST
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Today is the ultimate shopping day of the year as bargain mind consumers headed out at the crack of dawn in search of holiday shopping deals. Many actually were out last night after dinner to take advantage of late night door busting saving.

To someone as shopping averse as I am, this seems to be the highest form of insanity. Around here, the motto is that if Amazon (AMZN) cannot deliver it, you are not getting it -- but many others seem to enjoy the craziness of the day.

Along with Black Friday comes the annual attempt to predict which retailers will shine this holiday season and which will bomb in the most important quarter of the year. As with all attempts to predict the unpredictable, this strikes me as foolishness, but analysts and traders do it every year. I have done pretty well with retailers over the years but prediction has nothing to do with it. I buy them at a big discount to book value and sell them when they are once again popular with no attempt to predict any particular month or quarter.

So this morning I fired up my screen in search of bargains among retail stocks and discovered that there are no almost none to be had in the sector. J.C. Penny (JCP) has been the subject of a lot of recovery talk and the stock trades below book value, but the financials are horrible. It is a coin flip as to the company's future and I see no margin of safety in the shares at all. Only Transworld Entertainment (TWMC) makes it through my screens and appears to be a safe ad cheap retailer worthy of investing in right now.

I did run across quite a few that should probably be avoided by most investors at the moment. Whole Foods (WFM) tops my list of no-no retailers -- the shares are as expensive as the stuff on their shelves. I patronize the stores from time to time, but only because my wife loves the place for some reason. Being a natural born cheapskate, I have to close my eyes at the register in the place. The company missed estimates last quarter and, predictably, Wall Street knocked the shares down a bit but the stock is still over 30x earnings and 5x book value. The stock is not cheap and there is no margin of safety at all in the shares.

lululemon athletica (LULU) is still on my list of retailers to be avoided. You will be thankful to learn that unlike Whole Foods, I do not patronize their stores and I am always somewhat shocked at how popular they have become. No matter how much aficionados love their yoga-related offerings, the stock trades at 37x earnings and 10x book value. The stock is not even a growth at a reasonable price issue as the PEG ratio is over 2. It is a "growth at any price stock" and that has the potential to cause a permanent impairment of capital when the company inevitably stumbles or falls out of favor.

Ulta Salon (ULTA) is a makeup store whose stock is priced as though the the company has discovered the Fountain of Youth or invented the warp drive. I also confess that I have been wrong about the shares, as this momentum darling has just kept going higher. It may do so in the future, but it will do it without me. No retailer is worth 43x earnings and 9x book value -- no matter how much my wife and daughters spend in the place.

I have seen the analysts predicting a big holiday season but unless my math is faulty, the discounts I am seeing will mean much lower profit margins for the nation's retailers this year. My real and electronic mailboxes are full of 50% off offers on everything from laptops to Orioles jackets. Consumers may be spending a little more this holiday but they are being very deal conscious and bargain oriented.

Owning the high-priced retail stocks cold lead to a very unhappy new year if the season disappoints. These stocks are not cheap and the margin of safety is nonexistent. Investors should avoid them the way I am avoiding the mall today.

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