In the wake of its annual Prime Day, Amazon.com Inc. (AMZN, Financial) hit an all-time high on Monday morning of $1,830.99 as consumers rushed to take advantage of the deals the e-commerce giant had to offer. While the company had a minor setback as a result of its servers crashing from all the traffic, CNBC reported the event was Amazon’s “biggest in history” with over 100 million products sold.
The company, which is beginning to push into other industries, has already disrupted the traditional retail sector, forcing its competitors to make changes to their businesses in order to survive. Regardless, value can still be found among a group of retailers trading below their Peter Lynch values.
Lynch, a legendary value investor, developed this method in order to simplify his process of picking stocks by comparing the price of a stock over time to the company’s earnings. He set the standard for this analysis at a price-earnings ratio of 15 as he believed mature, stable companies are worth 15 times their annual earnings. Stocks trading below this level are often good investments as their share prices are likely to increase over time.
The retail companies that are currently trading below the Peter Lynch value, which also have at least a two-star business predictability ranking and have grown earnings by at least 6% over the past decade, are Bed Bath & Beyond Inc. (BBBY, Financial), Dick’s Sporting Goods Inc. (DKS, Financial), L Brands Inc. (LB, Financial), Qurate Retail Inc. (QRTEA, Financial) and Sally Beauty Holdings Inc. (SBH, Financial).
Bed Bath & Beyond
The New Jersey-based retail chain, which sells everything from bedding and house décor to kitchen electronics and storage items, has a market cap of $2.67 billion; its shares were trading around $19.05 on Wednesday with a price-earnings ratio of 6.74, a price-book ratio of 0.93 and a price-sales ratio of 0.22.
The Peter Lynch chart below shows the stock is trading below its fair value, suggesting it is undervalued.
Supported by a comfortable level of interest coverage and a strong Altman Z-Score of 5.08, GuruFocus rated Bed Bath & Beyond’s financial strength 7 out of 10.
The company’s profitability and growth also scored a 7 out of 10 rating. While the operating margin has been in decline for the past five years, it still outperforms 69% of competitors. It is also strengthened by a moderate Piotroski F-Score of 6 and a business predictability ranking of two out of five stars. According to GuruFocus, companies with this rank typically witness an average gain of 6% per year.
Of the gurus invested in Bed Bath & Beyond, Hotchkis & Wiley has the largest position with 6.07% of outstanding shares. Other top guru shareholders include Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, PRIMECAP Management (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Dick’s Sporting Goods
The sporting goods chain, which is headquartered in Pittsburgh, has a market cap of $3.49 billion; its shares were trading around $34.09 on Wednesday with a price-earnings ratio of 11.11, a price-book ratio of 1.86 and a price-sales ratio of 0.41.
According to the Peter Lynch chart below, the stock is undervalued since it is trading below its fair value.
Dick’s Sporting Goods’ financial strength was rated 7 out of 10 by GuruFocus. While the company has issued roughly $224.6 million in new long-term debt over the past several years, it is still at a manageable level. The Altman Z-Score of 4.24 further solidifies the company’s financial standing.
The company’s profitability and growth was rated 7 out of 10. Although the operating margin is declining, it still outperforms 61% of peers in its industry. The company is also strengthened by a Piotroski F-Score of 6 and a three-star business predictability ranking. GuruFocus says companies with this rating typically see an average gain of 8.2% per year and have consistent revenue and earnings growth.
With 1.18% of outstanding shares, Manning & Napier Advisors Inc. is the company’s largest guru shareholder. Jim Simons (Trades, Portfolio), Ron Baron (Trades, Portfolio), Greenblatt, Richard Snow (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and several other gurus also own the stock.
L Brands
Based in Columbus, Ohio, the company, which owns the Victoria’s Secret, Bath & Body Works and Henri Bendel brands, among others, has a market cap of $8.9 billion; its shares were trading around $32.10 on Wednesday with a price-earnings ratio of 9.84 and a price-sales ratio of 0.71.
Based on the Peter Lynch chart below, the stock appears to be undervalued as it is trading below its fair value.
GuruFocus rated L Brands’ financial strength 5 out of 10. Not only does the company have weak interest coverage, but its Altman Z-Score of 2.85 indicates it is under some financial pressure.
The company’s profitability and growth scored a 7 out of 10 rating. Even though the company’s operating margin is in decline, it still outperforms 88% of industry peers. In addition, the Piotroski F-Score of 5 indicates operations are stable. The company also has a 3.5-star business predictability rating, which is on watch. According to GuruFocus, companies with this rating gain, on average, 9.3% per year and have strong earnings and revenue growth. The ranking is on watch because changes in its business or industry may impact its future performance.
Primecap is the company’s largest shareholder among the gurus with 6.76% of outstanding shares. Other top shareholders include Barrow, Hanley, Mewhinney & Strauss, the T Rowe Price Equity Income Fund (Trades, Portfolio), Simons, Pioneer, Greenblatt and Bernard Horn (Trades, Portfolio).
Qurate Retail
The Englewood, Colorado-based company, which consists of eight specialty retail brands, including QVC, HSN and Zulily, has a market cap of $10.28 billion; its shares were trading around $21.89 on Wednesday with a price-earnings ratio of 8.13, a price-book ratio of 1.55 and a price-sales ratio of 1.21.
The Peter Lynch chart below shows the stock is undervalued since it is trading well below its fair value.
Qurate’s financial strength was rated 5 out of 10 by GuruFocus. As the company has issued $303 million in new long-term debt over the past three years, its financial position has weakened. This is supported by an Altman Z-Score of 1.39, which indicates the company is at risk of bankruptcy.
The company’s profitability and growth was rated 7 out of 10. Although the operating margin has declined over the past several years, it still outperforms 82% of its competitors. In addition, the Piotroski F-Score of 5 indicates business operations are stable. The company has a three-star business predictability rating, boosted by strong earnings and revenue growth.
Dodge & Cox has the largest holding with 5.69% of the company’s outstanding shares. Bill Nygren (Trades, Portfolio), Charles de Vaulx (Trades, Portfolio), Chris Davis (Trades, Portfolio), Gabelli, Wallace Weitz (Trades, Portfolio), George Soros (Trades, Portfolio) and several other gurus are also shareholders.
Sally Beauty
Headquartered in Denton, Texas, the beauty and salon products retailer has a market cap of $1.93 billion; its shares were trading around $15.81 on Wednesday with a price-earnings ratio of 8.24 and a price-sales ratio of 0.53.
According to the Peter Lynch chart below, the stock is undervalued since it is trading well below its fair value.
GuruFocus rated Sally Beauty’s financial strength 4 out of 10. While the company has insufficient interest coverage, its Altman Z-Score of 3.29 indicates it is financially stable.
The company’s profitability and growth fared much better, scoring an 8 out of 10 rating. Although the operating margin has declined over the past several years, it still outperforms 85% of industry peers. In addition, the Piotroski F-Score of 6 implies business operations are good. The company also has a 4.5-star business predictability ranking. GuruFocus says companies with this ranking typically see an average increase of 10.6% per year and have strong earnings and revenue growth.
With 0.74% of outstanding shares, Gabelli is the company’s largest guru shareholder. Chuck Royce (Trades, Portfolio), Greenblatt, Jeff Auxier (Trades, Portfolio), Bridgewater Associates and Paul Tudor Jones (Trades, Portfolio) are also shareholders.
Disclosure: No positions.
