Jones Apparel Looks Better Than Its Price

I never imagined that I'd see the day when a solvent, cash-flow-positive S&P 500 component not overburdened with debt would sport a micro-like market cap. But that's precisely the case with Jones Apparel (JNY - commentary - Cramer's Take), a women's clothing designer, marketer, wholesaler and retailer.

Amid the fallout from an economy that's several months in recession (that's my take anyway) and consumers who are not spending because of fear, Jones shares are down nearly 85% from their 52-week high and 68% in the past three weeks alone. Clearly, the market is pricing in an at least a major dividend cut, and perhaps even an Armageddon-like scenario, as Jones' current indicated dividend yield is north of 19%.

Don't get me wrong, I'm not bullish on retailers, or on wholesalers for that matter. But there's a huge difference between being naively optimistic about an industry that appears to be in near-shutdown mode and recognizing assets that are severely mispriced, which I believe adequately describes Jones' current situation.

Jones' third-quarter sales fell 6.2%, to $948.6 million, and income from continuing operations before income taxes fell 14%. Net income for the third quarter was $27.3 million, but that's not comparable with last year's $400.1 million, because the bulk of that ($352.6 million) was the result of income from discontinued operations and an income tax benefit. Clearly, though, Jones' business will suffer in the fourth quarter, and the company is slowing plans to open new stores and cutting investments in technology in anticipation of the uncertainty.

Just how bad fourth-quarter retail numbers will be is anyone's guess, as is the question of how long the slowdown in consumer spending will persist. But it appears as though Jones is being priced for the scrap heap. At just over $3 at this writing, Jones shares are akin to a long-dated call option on the fate of consumer spending and on the company's ability to function until the sun comes out again.

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At the time of publication, Heller was long JNY.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Jones Apparel to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.