3 Retail Stocks Join Under $10 Watch List

We wanted to give you our view on what's happening with the market and also alert you that we are adding three stocks to the watch list of TheStreet.com Stocks Under $10 service. Much of this article was sent to subscribers of the Stocks Under $10 service, but we wanted to share our views with the readers of TheStreet.com. (Click here for a free trial to Stocks Under $10 to receive all our alerts as they occur.)

Now let's take a look at the market. The past 12 months have proven difficult for investors in many sectors. A major economic slowdown and deterioration in the credit markets created a pair of major headwinds for companies in industries ranging from finance to technology. One of the hardest-hit sectors during this time was retail, which had been battered due to a major pullback in consumer spending.

The concern over the state of the average U.S. consumer does not come as a surprise. For the past year, we've repeatedly expressed our belief that the slowdown in the U.S. housing market would be far-reaching and likely have more dire consequences for investors than most analysts were expecting. The continuing rise in gas prices adds another obstacle for companies that rely on healthy consumer spending.

In terms of the model portfolio for the Stocks Under $10 service, we've steered clear of many of the retail names that seemed interesting after considerable declines during 2007. However, we believe it's time for aggressive investors to consider some of the beaten-down under-$10 stocks in the retail sector -- especially the apparel companies, where expectations have fallen to the point where we believe the risk/reward is quite attractive.

Investing in stocks that trade under $10 often involves picking up shares in companies that were once highfliers but have fallen on hard times. While many well-known names carry high levels of risk that leave us unimpressed, a few have reached levels at which the worst-case scenario appears to be priced into the stock. Looking at the apparel sector, we see a number of companies that fit this description.

Here are a few names that we are adding to our watch list this week: Chico's(CHS Quote) is a great example of a fallen star. As recently as two years ago, its stock traded above $40, as the company was in the midst of capitalizing on its successful focus on apparel for middle-aged women. But Chico's ran into trouble well before the recent slowdown in consumer spending, as other retailers caught on to the company's strategy and competition increased dramatically.

Today, shares are sitting at about $8 -- a price that we believe does not factor in the company's decision to cut back on spending and decrease the square footage of its stores. There is significant turnaround potential for Chico's if the company is able to reverse declining margin trends and boost sales productivity from current levels in the range of $700-$800 per square foot, still well above the industry average of around $400.