Quick Look: Finding Fashion in Apparel Sector

Liz Claiborne

Second only to Hasbro (HAS - commentary - Cramer's Take), Liz Claiborne (LIZ - commentary - Cramer's Take) is the stock that I've mentioned most frequently over the past 33 months on RealMoney. I continue to think that allocating capital to this stock at its current quote of roughly $33.50 is very compelling. I expect this $3.7 billion company to continue its growth trajectory and become a $10 billion company over the next eight to 10 years.

Led by CEO Paul Charron, one of the best CEOs around, the company has developed a diversified portfolio of brands across a variety of consumer segments. With dozens of brands, shareholders don't carry the same fashion risk as a one-brand company such as Nike (NKE - commentary - Cramer's Take) or Kenneth Cole (KCP - commentary - Cramer's Take).

Charron continues to make small acquisitions to add to the company's brands. He allocates capital with discipline, rarely issuing stock when making an acquisition. The company is at a strategic inflection point in that it is transforming itself from a domestic apparel powerhouse to a worldwide supplier of apparel brands.

Phillips-Van Heusen

I've highlighted Phillips-Van Heusen (PVH - commentary - Cramer's Take) in past years on RealMoney. This leading apparel maker has a dominant market-share position in dress shirts with the Geoffrey Beene and Van Heusen collections and in sportswear with the Izod brand, among others.

It's the relatively recent purchase of Calvin Klein, though, that has the apparel sector in a buzz. This is a bet-the-farm move by CEO Bruce Klatsky, and the details of the transaction suggest that shareholders of Phillips-Van Heusen are smack in the middle of a very-high-stakes gamble.

The Calvin Klein transaction is complex, with 8% convertible preferred stock issued at a conversion price of $14 per share, and private equity and other debt and securities as part of the package. I think Phillips-Van Heusen overpaid for Calvin Klein and completely turned upside down the risk profile of owning equity in the company. This roll-of-the-dice acquisition, which, in effect, doubles the size of the company, could pay off big or be a complete flop. I'd avoid this stock; there's too much risk and uncertainty.

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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.