Three Cheap Retailers

Finding a bargain in retail stocks is getting difficult.

The sector has been very strong for the past nine months. Since bottoming in July, the S&P Retail Index is up more than 24%, outpacing the S&P 500's 19% gain in the same period.

Measured on a price-to-earnings basis, many retailers are fairly valued or even trading at a premium. Gap (GPS Quote) is trading at 20 times trailing 12-month earnings and 21 times forward earnings, with buyout rumors buoying the stock despite a poor performance at its stores. Talbots (TLB Quote) is at 42 times trailing and 22 times forward earnings.

However, when you take growth into consideration, retailers are projected to post some impressive numbers. Within the group of over 150 retailers and restaurants that I track, the apparel group is expected to grow profits 16.7% over the long term, according to consensus estimates. Electronics and grocery stores are predicted to achieve growth of nearly 16% each.

It's OK to pay a higher multiple for growth. If you have a company such as Target (TGT Quote) that is expected to expand earnings nearly 18% over the long term, a forward multiple of 20 is reasonable.

That said, there are still a few good deals left in the sector. I combed through my data base to find some cheap stocks and whittled down the list after looking at the fundamentals. Here are some of the best value plays in the retail and restaurant space.

Cheap Goods, Cheap Stock

When it comes to the dollar stores, many analysts are as nervous as a sober karaoke singer. Rising gas prices, inflation and worries about a slower economy all could hit the stores' target demographic of middle- and low-income consumers.