Jensen: Bed Bath Hasn't Gained Steam Just Yet
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Homebuilding stocks are one of the best-performing sectors of 2012. These equities correctly anticipated the housing recovery by running higher ahead of it, and then they continued moving up as the rebound gained momentum. The SPDR S&P Homebuilders (XHB) has risen some 55% so far this year, and some individual homebuilding stocks have gained much more than that.
Valuation and Balance Sheet:
- Bed Bath & Beyond is selling for under 12x forward earnings, a discount to its five-year average of 15.6x.
- Up until last quarter's miss, the company had beaten earnings estimates for 11 straight quarters.
- The company has a solid balance, rated at BBB+. Despite the difficult environment, it has also managed to increase operating cash flow some 35% over the past three years.
- The 21 analysts who cover the stock have a $75 median price target on Bed Bath & Beyond. Standard & Poor's has assigned it a Buy rating and an $82 price target.
Growth Prospects and Catalysts:
- Continued momentum in the housing market should obviously be good for one of the largest providers of home furnishings in the U.S. In addition, when demand does pick up, the company should benefit from the recent demise of Linens 'n Things and other competitors during the recession.
- Impressively, the company has managed to grow revenues by a 7% annual clip over the past five years despite the challenging economic environment.
- The stock has a five-year projected price-to-earnings ratio relative to growth (PEG) of near 1 (1.04). Early indications of holiday spending also seem strong this year, and this could buoy the entire retail sector.
Insiders and Technicals:
- Insiders haven't been frequent sellers of the stock: They've unloaded less than 2.5% of their total holdings over the last six months.
- The stock seems to have solid technical support at just under the current price levels.
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