I have been increasing the allocation in my portfolio to the retailing sector over the past several months while lightening the allocation to industrials. The domestic economy might be anemic, but it is significantly better than the disaster known as Europe. One of the key attributes of the retailers in my portfolio is they have little if any exposure to the European continent. The sector also is offering reasonable valuations apart from a few outliers.
In today's column, I will highlight two of the recent retailing positions in my portfolio. One selection is focused on the low end part of the market and is expanding rapidly. The other retailer has only been public for two years and is focused on the higher end market. The stock has suffered a recent, but temporary, setback, which has set up an attractive entry point.
Dollar General (DG) is a discount retailer located primarily in the southern, southwestern, midwestern and eastern U.S. It has over 10,000 stores in 40 states.
Four reasons DG is a solid long-term holding at under $49 a share:
- Very few retailers have benefited as much from the anemic economic growth and the eroding median domestic income over the past five years. Despite the difficult economic environment, the company has increased revenues more than 60% over the past five fiscal years.
- The company recently raised its full year EPS and same-store sale guidance and added another $500 million to its stock repurchase program.
- Dollar General is generating much stronger same store sales growth than competitors such as Dollar Tree (DLTR) and Wal-Mart (WMT). The stock has a five-year projected PEG of under 1 (.95).
- DG sells for less than 15x forward earnings, a discount to its five-year average (16.3). The median price target by the 17 analysts that cover the stock is $61 a share.
Vera Bradley (VRA) designs and markets stylish and functional accessories for women under the Vera Bradley brand name.
Four reasons VRA is a good pick-up at $22 a share:
- VRA has been impacted recently by a poorly received earnings reports and the stock now sells for less than 12x forward earnings. Soon after it came public in late 2010, it routinely sold for 35x-40x forward earnings.
- Prior to that quarterly earnings disappointment, the company had beat earnings estimates for seven straight quarters. The company also hinted that July sales were strong versus second quarter performance, so third-quarter performance looks poised to revert to its previous positive trend.
- The stock had a nice pop Monday as it was disclosed that SAC Capital had accumulated an almost 6% share in the company. Given SAC's track record, I also view this as a large positive.
- The company is about to start distributing its products to Japan, which accounts for 40% of the luxury handbag market worldwide.
