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Carnevale: Ross Stores a Buy on Bad News (Update 1)

By Chuck Carnevale

Updated from 11:04 am, to include closing prices on the last page.

NEW YORK ( F.A.S.T. Graphs) -- The stock market can often overreact to even the slightest amount of bad news. On Thursday, Ross Stores (ROST - Get Report) was down big, over 7.5%, on heavy volume. There were two pieces of news that could be attributed to this drop, although neither was of great importance to my way of thinking.

First, Piper Jaffray announced that they substantially lowered their price target from $86 a share to $71 a share. That represents a significant premium to their stock price currently at $55.23. However, I believe that this is the least likely reason for the big drop in Ross.

The most likely reason for their price drop was that Ross issued a press release announcing a modest increase in sales for the four weeks ending March 3, 2012. This seems to have greatly disappointed the myopic stock market. Although the announcement was below expectations, I for one do not believe that it justifies a 7% drop in their already reasonably-priced shares. In fact, I contend that it is completely irrational to believe that the intrinsic value of a publicly-traded company like Ross Stores could change by as much as 7% in one day.

Ross Stores The Business

I am more interested in the business behind the stock than I am the stock itself. I believe it is much easier to analyze the fundamentals behind a business in order to calculate its intrinsic value than it is to try and guess where the stock price might go next. The venerable Ben Graham taught us all that the market is bipolar with his famous Mr. Market allegory.

Ross Stores has one of the best operating histories of any company I've ever examined. It is the largest off-price apparel and home fashions chain in the United States. The company operates over 1,000 Ross Dress for Less stores in 33 states and over 100 dd's DISCOUNTS stores in eight states. The company earns high returns on capital and their stores operate with high gross and operating margins. Ross Stores is fiscally fit with only 8% debt to capital and generates consistently strong cash flows.
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