5 Retail Stocks to Ask Santa to Leave Under Your Tree

These companies are trading below Peter Lynch value

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Sydnee Gatewood
Dec 16, 2019
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Its the most wonderful time of the year, which means children are busy writing and mailing their Christmas letters to Santa and parents are looking for the best bargains to fill stockings. According to a survey conducted by the American Research Group, U.S. shoppers are planning to spend an average of $976 on gifts this holiday season, down from $992 in 2018.

While the National Retail Federations annual survey reported the most requested item on individual consumers holiday wish lists were gift cards at 59%, clothing and accessories were a close second. In addition, the survey found that while over half of the consumers surveyed said they planned to shop for gifts online, department stores were the number two choice. As such, investors may find good opportunities among traditional retail companies that are trading below Peter Lynch value.

A legendary investor who generated average annual returns of 29.2% while managing Fidelitys Magellan Fund, Lynch developed this strategy in order to simplify his stock-picking process. Believing that good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener also looked for companies with a business predictability rank of at least three out of five stars and a 10-year revenue per share growth rate of at least 6%.

As of Dec. 16, retail stocks that met these criteria included Nordstrom Inc. (

JWN, Financial), Kohls Corp. (KSS, Financial), L Brands Inc. (LB, Financial), Gap Inc. (GPS, Financial) and Urban Outfitters Inc. (URBN, Financial).

Nordstrom

The Seattle-based luxury department store chain has a $5.96 billion market cap; its shares were trading around $38.38 on Monday with a price-earnings ratio of 11.22, a price-book ratio of 7 and a price-sales ratio of 0.39.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.

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GuruFocus rated Nordstroms financial strength 4 out of 10. Although the company has issued approximately $49 million in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 1.83, however, indicates it is under some financial pressure as its revenue per share growth has slowed down over the past 12 months.

The companys profitability scored a 9 out of 10 rating. Although its margins are contracting, they still outperform over half of its competitors. In addition, Nordstrom has strong returns, a moderate Piotroski F-Score of 6, which suggests operations are stable, and a perfect business predictability rank of five out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 12.1% per annum over a 10-year period.

Of the gurus invested in Nordstrom,

Pioneer Investments (Trades, Portfolio) has the largest stake with 0.74% of outstanding shares. Other top guru investors include Ray Dalio (Trades, Portfolio), John Rogers (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Philippe Laffont (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Richard Snow (Trades, Portfolio).

Kohls

The department store chain, which is headquartered in Menomonee Falls, Wisconsin, has a market cap of $7.66 billion; its shares were trading around $49.09 on Monday with a price-earnings ratio of 11.27, a price-book ratio of 1.45 and a price-sales ratio of 0.39.

According to the Peter Lynch chart, the stock is undervalued.

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Kohls financial strength was rated 5 out of 10 by GuruFocus on the back of sufficient interest coverage and a high Altman Z-Score of 3.28 that suggests it is in good standing financially.

The companys profitability scored an 8 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of industry peers. Kohls is also supported by strong returns and a moderate Piotroski F-Score of 4. The 3.5-star business predictability rank is on watch as a result of the company recording a slowdown in revenue per share growth over the past year. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.

With 1.28% of outstanding shares, the T Rowe Price Equity income Fund is the companys largest guru shareholder. Pioneer, Dalio, Ainslie, Laffont,

Jeremy Grantham (Trades, Portfolio), John Hussman (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) also have positions in the stock.

L Brands

The Columbus, Ohio-based company, which owns popular brands like Victorias Secret and Bath and Body Works, has a $4.93 billion market cap; its shares were trading around $17.86 on Monday with a price-earnings ratio of 13.6 and a price-sales ratio of 0.38.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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GuruFocus rated L Brands financial strength 3 out of 10 on the back of low interest coverage. Additionally, the Altman Z-Score of 1.55 warns the company is in financial distress and could be at risk of going bankrupt.

The companys profitability fared better, scoring an 8 out of 10 rating despite having declining margins. L Brands is supported by strong returns that outperform over half of its competitors, but it has a low Piotroski F-Score of 3, which suggests operating conditions are in poor shape, and has recorded a slowdown in revenue growth over the past year. As a result, its 3.5-star business predictability rank is on watch.

PRIMECAP Management (Trades, Portfolio) has the largest stake with 6.72% of the companys outstanding shares. Other top guru shareholders are Jim Simons (Trades, Portfolio) Renaissance Technologies, Dalio, T. Rowe Prices Equity Income Fund, Ainslie, Greenblatt, Bernard Horn (Trades, Portfolio), Laffont, Cohen, Pioneer, Charles Brandes (Trades, Portfolio) and Caxton.

Gap

Headquartered in San Francisco, the retail company, which owns the Gap, Old Navy, Banana Republic and Athleta brands, has a market cap of $6.4 billion; its shares were trading around $17.19 on Monday with a price-earnings ratio of 8.05, a price-book ratio of 1.75 and a price-sales ratio of 0.4.

The Peter Lynch chart suggests the stock is undervalued.

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Gaps financial strength was rated 5 out of 10 by GuruFocus on the back of comfortable interest coverage. The Altman Z-Score of 2.27, however, indicates the company is under some financial pressure.

The retailers profitability scored an 8 out of 10 rating on the back of margins and returns that outperform a majority of industry peers. Gap also has a moderate Piotroski F-Score of 4 and a three-star business predictability rank, which is on watch as a result of a slowdown in revenue growth over the past year.

Of the gurus invested in Gap, Dodge & Cox has the largest stake with 5.61% of outstanding shares. The Parnassus Endeavour Fund, Pioneer, Simons Firm, Cohen, Caxton and Greenblatt are also shareholders.

Urban Outfitters

The Philadelphia-based retailer, which owns the Free People, Anthropologie and BHLDN brands , has a $2.61 market cap; its shares were trading around $26.68 Monday with a price-earnings ratio of 11.7, a price-book ratio of 1.83 and a price-sales ratio of 0.7.

According to the Peter Lynch chart, the stock is undervalued.

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GuruFocus rated Urban Outfitters financial strength 4 out of 10. The Altman Z-Score of 3.09 indicates it is in good financial health.

The companys profitability scored a 9 out of 10 rating despite recording a decline in its margins. Urban Outfitters is also supported by consistent revenue and earnings growth and strong returns. It also has a three-star business predictability rank.

With 1.23% of outstanding shares, Snow is the companys largest guru shareholder. Other top guru investors are Dalio, Cohen,

Louis Moore Bacon (Trades, Portfolio), Hotchkis & Wiley, Hussman, Ainslie, Pioneer, Greenblatt and Royce.

Disclosure: No positions.

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I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg