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Two Beaten-Down Retailers

Regular readers know that I am not a fan of the consumer discretionary sector right now. I do not believe the effects of the payroll tax holiday expiration, various other tax hikes and record gas prices for this time of year have been fully been factored into consumer spending projections. Spending has held up to this point but this will fade towards the end of the second quarter after tax refunds have quit coursing through the economy and job growth slows. There are already signs of stress on the consumer; for example, restaurant sales have been down two straight months.

Some retailers have unfairly been hit hard recently. I do well picking up discarded retail stocks once sentiment has changed and the stocks experience significant declines. I concentrate on leaders in their category or retailers with well-defined niches. I start by accumulating a small position in the beaten-down shares and add on market pullbacks and again after it appears likely the stock has bottomed. I did this quite successfully with Deckers Outdoor (DECK), where I am sitting on a nice gain. Here are two retailers that I will be looking to start a position in this week on the next pullback.

PetSmart (PETM) is the leading specialty provider of products and services for pets in North America. Its stock price has fallen about $10 over the last few months. Fully half of the decline came after soft guidance for 2013 sales growth in the latest earnings report. The company has some good things going for it, though.

For starters, pet ownership and spending per pet continue to rise in the U.S. Despite the guidance for 2013, the company had a solid 2012. Same-store sales grew more than 6% for all of 2012 and earnings were up 36% year over year in the most recent quarter, beating estimates. Its return on invested capital (ROIC) is currently more than 30% and the company has more than doubled operating cash flow per share over the past three fiscal years. The stock sells at under 14x 2015's projected earnings (fiscal year ending in January 2015), below its long-term historical average.

This article originally appeared on March 19, 2013, on RealMoney. To read more content like this + see inside Jim Cramer's $3 Million portfolio for FREE Click Here NOW.

Dick's Sporting Goods (DKS - Get Report) operates more than 500 stores in the U.S. The stock tumbled around 10% recently on a poorly received earnings report. This looks like an overreaction. The company grew revenue 12% year over year, even if that came in under the consensus. It also grew earnings 17% year over year (which is the average annual earnings growth over the last five years). A good portion of the sales miss can be explained by the erosion of the reputation of Lance Armstrong (half the company's elliptical and treadmill sales are under Armstrong's Livestrong brand). The stock is selling with a five-year projected price-earnings-growth ratio near 1 (1.06) and just over 14x next fiscal year's expected earnings, a discount to its five-year average. The company still has plenty of room to expand in the West and Southwest or via acquisition.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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