Quick Look: Finding Fashion in Apparel Sector

In this, the debut of what I call my weekly "Quick Look" series, I'll take a look at the apparel sector. I'm trying to do a regular weekly series of "quick looks" to provide you with a forum that will serve to generate a stock idea or two. It's not meant to be comprehensive. It's intended as a starting point for your own research.

The Best Fits

Most apparel companies are nothing more than high-powered, high-margined marketing machines. Their goal is to attract a stable, growing base of consumers. Although revenue growth isn't exciting for most apparel makers -- mid- to high-single-digit sales growth is the norm -- there's a lot to like about apparel companies, such as their ability to generate huge amounts of free cash flow.

They generate this free cash flow, of course, because they generally outsource production to foreign companies, making large capital expenditures unnecessary. A number of apparel stocks have been in the news lately. Here are a few of them that merit a mention:

Jones New York

Jones New York (JNY - commentary - Cramer's Take) looks like a solid buy at the current quote, which is about $28 and change. The company is enmeshed in a struggle after losing a Ralph Lauren (RL - commentary - Cramer's Take) license, which will cost Jones New York roughly 10% of its revenue stream. Part of that is replaceable, though it's impossible to gauge the amount with any precision. My working assumption is that Jones New York will lose 6% to 8% of its revenue base, and the subsequent hit to earnings will result in understated profitability for the next year or so, until expenses get in line with a lower revenue base.

Jones New York isn't going to be a huge winner for investors at these levels. But maximum pessimism has been priced into the shares. A buyer now can expect a fair business value in the high $30s over the next 12 to 18 months.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, Alsin and/or ACM was long Hasbro, Liz Claiborne and Kenneth Cole, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.