Quick Look: Shopping for Specialty Retailers

Turning It Up

I admit that I parsed the financials of Best Buy (BBY - commentary - Cramer's Take) when it pierced $20 per share last fall. It is the clear No. 1 in consumer electronics, but I moved too slowly and missed the opportunity. In working with turnaround and/or other companies that have been struggling, timing is everything. Sometimes you have very little time to jump on a heavily discounted franchise, such as with Best Buy last November, and other times you have one or two years in which to build a position. By my calculation, Best Buy is overvalued by a couple of bucks at the current quote of $48.

Circuit City (CC - commentary - Cramer's Take), a distant No. 2 in this segment to Best Buy, is a stock worth considering, especially if you're a short-term investor. It's now trading at roughly $9.50, but I've ratcheted my fair value to the high teens based on the assumption that a pickup in consumer demand is in the offing, and because higher-margin digital products will make up a larger share of the sales base for the remainder of the year.

Stylish Outfits

Don't get excited about recent gains in Gap (GPS - commentary - Cramer's Take) stock or the increase in same-store-sales comparisons. Easy comps and a low base of profitability have generated excessive excitement about Gap's turnaround efforts. With more than $15 billion in sales and more than 4,200 stores, there isn't much room for growth. Accordingly, the equity here should discount meager growth prospects and a very weak balance sheet as well. Look for a lethargic stock price and/or weakness in the stock by early next year, when the company will face much more difficult sales comparisons.

Overlooked by most investors, TJX (TJX - commentary - Cramer's Take) is a much better apparel retailer than the Gap. With a couple of proven store concepts, such as TJ Maxx and Marshalls, TJX has much more impressive operating metrics than the Gap and a strong balance sheet, too. Take a look at the return on shareholders' equity at TJX: It has averaged 40% for the past five years. TJX management is a friend to shareholders, having used excess free cash flow to shrink the share base by more than 20% over the past five years.

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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 TJX, 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.