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Retail Value Traps and Value Plays


The return-on-equity and debt, taken together, should be in line with others in the sector that are well-managed.

These are valuable indicators. The return-on-equity demonstrates how much profit the company is making off what it owns. Debt is reveals how well it is able to finance the enterprise without borrowing money. Together, these show how efficiently and how effectively the business is operating.

Warren Buffett likes to see a return-on-equity of 20%. Wal-Mart has a return-on-equity of 23.60%. Wal-Mart has a debt-to-equity ratio of 0.84. (Hence, 84 cents required to produce every dollar of equity for Wal-Mart.)

For Sears, the return-on-equity is a negative 62.90% and the debt-to-equity ratio is 2.54. J.C. Penney has a return-on-equity of a negative 71.80% with a debt-to-equity ratio of 2.12. The return-on-equity for Bon-Ton is 13.60% with a debt-to-equity ratio of 20.30.

While a picture may be worth a 1,000 words, the price is the only number that matters when it comes time to buy or sell a stock.

For Sears, Bon-Ton, and J.C. Penney, a very ugly portrait has been composed. All are down around 10% for the last month of market action, and off for the week, too. With the level of debt that each has combined the grim sales and earnings performance, it is no wonder the return-on-equity is so poor for all. That is why these collapsing retail stores are not value plays, but "pathetic" value traps that investors should avoid.

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.
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