The two “Historical Low” screeners, Historical Low P/S and Historical Low P/B, picked Kohl’s Corp. (KSS, Financial) as one of the most undervalued stocks in the retail industry.
Companies that have historical low P/S and P/B ratios usually become top stocks to buy among gurus. According to the January 2010 new feature announcement, Arnold Van Den Berg (Trades, Portfolio) of Century Management predominantly uses the low P/S strategy to choose stocks in which to invest. Since 2010, the historical low P/S and historical low P/B strategies have outperformed the Standard & Poor’s 500 index nearly each and every year, as summarized in the table below.
The “Top 25 Historical Low P/S” portfolio currently contains Kohl’s and another great stock in the retail industry, Bed Bath & Beyond Inc. (BBBY, Financial). As of June 8, the total return of this portfolio since its Dec. 30, 2010 inception is 122.95%, which is about 40% higher than the S&P 500 return for the same period. Additionally, Bed Bath & Beyond is also featured in the “Top 25 Historical Low P/B” portfolio, which has a total return of 117.16% since its inception.
A very stable company
Incorporated in 1988 in Wisconsin, Kohl’s has experienced stable growth in previous years. The company has had consistent per share revenue growth and high dividend yields, suggesting that Kohl’s can sustain the stable growth in the short term. As the company’s stock price declines, Kohl’s P/S ratio decreases due to the increasing revenues per share. Currently, Kohl’s P/S ratio is near 10-year lows, a likely reason why the company is featured on the Historical Low P/S screener.
In its recent 10-K, the management at Kohl’s discussed several likely explanations for the company’s successful financial growth. The “Greatness Agenda,” a multiyear strategic framework, and increased emphasis on national brands helped increase the company’s sales during the past two years. The “Yes2You” loyalty program further increased company sales in the second half of 2015. The above incentives likely explain why the company’s net sales increased about $200 million from 2014 to 2015.
Compared to its competitors, Kohl’s has the lowest PE (NRI), P/S and EV/EBIT ratios, despite having the lowest market cap. Additionally, Kohl’s has a dividend yield close to a 10-year high and higher than 85% of global department store companies. The Wisconsin-based retail company also has a relatively high earnings yield and Yacktman forward rate of return, which further strengthens Kohl’s stability.
Bed Bath & Beyond has good financials, too
Although Kohl’s is stable based on per share revenue growth and high dividend yields, the company has a modest Piotroski F-score and interest coverage. With an interest coverage of just 4.27, Kohl’s does not have a highly robust financial system. Bed Bath & Beyond, on the other hand, has a more robust financial system, probably because it has an interest coverage of 22.67, significantly higher than that of Kohl’s. Although it has more volatile Piotroski F-scores than Kohl’s does, Bed Bath & Beyond currently has a slightly higher F-score than does Kohl’s.
Founded in 1971, Bed Bath & Beyond has a high return on investment capital (ROIC) compared to its WACC. With a 26.34% ROIC and a WACC of just 7.93%, the retail company makes excess returns on its capital, suggesting that the company’s value will increase as growth increases. Kohl’s also has a high ROIC compared to its WACC, but Kohl’s ROIC is only 4% higher than its WACC (8.99% ROIC versus a 5.55% WACC).
Based on its Peter Lynch chart, Bed Bath & Beyond is undervalued compared to its earnings line.
Despite having decreasing Yacktman forward rates of return from 2006 to 2010, Bed Bath & Beyond generally had higher forward rates of return than Kohl’s did during the past 10 years. This suggests that Bed Bath & Beyond has a higher potential for positive returns in the upcoming years. Furthermore, the retail company currently has a 20.71% forward ROR, which is higher than 85% of global specialty retail companies.
Other potential good retail companies exist
Bed Bath & Beyond and Kohl’s are the top two retail stocks according to the historical low P/S screener. However, these are not the only good retail companies to invest in. To find more good retail companies, you can use the All-in-One Screener and apply filters matching your stock criteria. For example, you may want to look for 5-star retail companies whose P/S ratios are in the bottom 50. Additionally, you could also see which stocks in the retail industry are undervalued and predictable.
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