American Apparel, E*Trade Join Stocks Under $10 Watch List

Earnings season is in full swing, and we are seeing waves of market-moving economic data that will certainly influence stocks this week. As such, we want to give readers a quick update on our outlook, as well as update our Watch List.

The FOMC is expected to lower the fed funds rate by 25 basis points when it meets this Wednesday, but more importantly, the Fed may signal an end to its easing cycle. In other words, inflation -- which normally subsides during periods of slower gross domestic product (GDP) growth -- has taken center stage as opposed to the chances of a deep recession.

With $100 billion in stimulus checks now hitting bank accounts (which should induce consumer spending in the near term) and the sentiment surrounding the markets clearly changing from nervous to calm over the past two months, we agree that the Fed should be more concerned about inflation -- for now.

But once these rebate checks are spent, what's next?

As everyone knows by now, the housing market is far from reaching a bottom; we certainly didn't need Eli Broad, the co-founder of KB HomeKBH, to tell us this yesterday. With tighter lending requirements, it's nearly impossible for the low- or middle-income investor to buy a home. Lenders now require a 20% down payment for loans, and borrowers must have a good credit scores.

Also, recent reports suggest that a number of states are tapping emergency reserves and may have to raise property taxes. These costs, on top of rising food and energy prices, suggest that most consumers who can afford homes will elect not to spend most of their life savings on an asset that has a high probability of depreciating over the next few years.

On the earnings front, so far most large-caps reported better-than expected earnings in the recent quarter. However, we question the quality of these earnings. For example, most attributed the strong showing to the weaker dollar, which is not necessarily an indication that business is healthy. Also, if the recent strength in the dollar persists, this could have a negative impact on earnings going forward.

Last, the majority of quarterly conference calls that we listened to predicted rougher times ahead in the U.S. While we agree, many stocks already have this risk priced in, which could create favorable entry points for long-term investors.

That said, we are adding American ApparelAPP and E*Trade ETFC to our Watch List. (Please click here for a free trial to our TheStreet.com Stocks Under $10 service.

Shares of American Apparel have fallen hard since December, mostly due to negative publicity as the CEO fought off sexual harassment charges and internal problems as management needs to get up to speed with Sarbanes-Oxley requirements. Looking past the noise, the company has a very strong brand and plans to open stores in China, Brazil and Denmark to complement its already large international presence.

American Apparel trades at 13 times next year's earnings, which are expected to grow by 30% over the next three years, according to Capital IQ. Also, management is looking to open up to 45 stores this year, which amounts to a 25% increase in total store count.

We are also taking a look at E*Trade. The stock traded at $25 less than a year ago, but management's ambitious goal to expand into home-equity loans resulted in an all-out collapse in the stock price to $2.10 after the credit markets seized up. In November, Citadel Investment Group provided a quick fix by injecting $2.5 billion into the company, but the terms of the deal did not favor shareholders.

E*Trade saw huge deposit outflows before the cash infusion, but this trend has reversed as new accounts increased by 64,000 (bringing in $300 million) in the latest quarter. The company is benefitting from a restructuring, but there are still headwinds related to its large loan portfolio.

We are in the early research process and, as always, will update readers if we believe these stocks have a favorable risk/reward.

American Apparel and E*Trade are on the watch list of TheStreet.com Stocks Under $10 service. Frank Curzio and Larsen Kusick, who manage TheStreet.com Stocks Under $10, write regularly about low-priced stocks, such as FordF, Evergreen SolarESLR and PerficientPRFT for TheStreet.com.