Sunday, April 10, 2011

"A late Easter and a rise in Cotton prices has led to some bargains in Retail Apparel stocks"

Dow Jones Industrial Avg. 12,380 (UP) Week ending 04-08-2011

We have all heard about the meteoric rise in the price of Cotton. Demand is steady and in high volumes to China, India and Pakistan.

What the newsmen have not told you is that demand for cotton has actually dropped by 7 million bales since 2006.  This is similar to another commodity, Oil , where speculation has driven the price higher, while worldwide demand is leveling off.

As we have all seen in the housing market, speculation or what Alan Greenspan called "Irrational exuberance," eventually comes to an end and prices return down toward the "mathematical mean" price.  When this happens with cotton, it will be a windfall to some well run apparel retailers.  Easter being late in April this year is also going to create soft sales numbers for apparel retailers for their Q1 2011 number comparisons to Q1 2010 figures. Q2 numbers on the other hand, should be excellent comparisons. Here are a few names that should benefit from this phenomena. I would buy them now and hold into the Christmas holiday.
Aeropostale Inc. (Symbol ARO, $25.62)  even without cotton prices  going down currently has a Return on Equity of 49.2%. ARO also has a 5 year sales growth of 15.31% and 5 year earnings growth of 31.85%. Sometimes you need to shop in the off season to get investment bargains. Don't forget that this stock's share price is up 91.51% over the last 5 years.

Limited Brands Inc. (Symbol LTD, $37.17)  is projecting 2012 earnings of $2.31 and 2013 earnings of $2.64 per share. LTD has  Return on Equity of 42.5% and offers a too reasonable dividend of 2.15%. This stock has a three year total return of 132%. March sales have been surprisingly strong against lowered expectations with a backdrop of unusually cold weather, bubbling gasoline prices and the shift of Easter into April.

Urban Outfitters Inc. (Symbol URBN, $30.91) is a company to like for a lot of reasons. 2012 earnings are projected at $1.74 per share and for 2013 looking like $2.08 a share. Urban has a great balance sheet with a Current ratio of 3.81 to 1 and has no long term debt.
 This company with a 5 year sales growth  rate of 16.15% is a real bargain at this "off the rack" price. These three are all quality investments; a piece of the puzzle.

These are 8 month investments, so don't worry if they bounce up and down in price between now and then.
 Just pick one out and go with it.


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