Don't Be Fooled By Liz Claiborne's Cheap Price Tag

Investors should not be in apparel stocks right now, even if valuations are starting to look attractive.

This includes clothing manufacturer Liz Claiborne (LIZ - Cramer's Take - Stockpickr), whose shares are off about 20% since the beginning of September and now trade at a seemingly attractive nine times next year's estimated earnings.

The company's shares had started their skid before the terrorist attacks, just after Paul Charron, the company's chief executive officer, sold about $3 million worth of the company's stock. The attacks further dimmed an already bleak outlook for the sector. Apparel companies have fallen out of favor this year because of a lack of new fashions and increasing worries of a prolonged consumer-spending downturn.

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In the wake of the attacks, this process accelerated, and many analysts have been busy slashing estimates for a host of apparel companies, including Liz. However, there are good indications that analysts' estimates could come down even further.

In many cases retailers have cut their fourth-quarter orders from clothing manufacturers such as Liz, which will pressure margins. Among the hardest hit have been outlets that stock fashion items, such as department stores. Analysts have largely taken this into account in their reduced estimates, but the uncertainty could continue long past the upcoming holiday season.

What could make things worse -- and weigh further on share prices -- is the likelihood that spring orders will be cut. This is not a mere possibility, but is likely, especially given reduced growth forecasts for consumer spending, notes one of the more bearish Liz analysts, Jeffrey Edelman of UBS Warburg. In 2002, growth could be just 0.9%, down from the 3.1% growth projected prior to the attacks, the analyst says. (Edelman rates Liz a hold, and his firm does not have a banking relationship with it.)

Long term, there is optimism. The company recently acquired the Mexx Group, a privately held, European apparel manufacturer, in a deal that is expected to add to Liz's bottom line once Mexx is fully integrated with it.

In the meantime, the economy is likely to continue to wobble, and investors would be wise to put their money to work elsewhere.