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Three retail stocks with upside potential

Chris Lau, Kapitall: Did the harsh winter put a beat down on retailers? Here are three retail stocks with upside potential.

The rapid decline in stock markets means value investors will see better days ahead. Stocks supported by speculation and momentum will not do very well if sentiment does not turn positive over the next few weeks. Some stocks have been unfairly punished, however, and many of them are in the retail sector. In the last quarter, retail demand could have been impacted negatively by the unusually severe weather. This will hurt short term results. What then, are companies that could experience a rebound in demand over the course of the year?

1.     Staples, Inc. (SPLS)

Staples trades at a price of profit of 11. Down 14.2% in the last year, the company is trying to reduce its costs, offer more relevant solutions to small businesses, and increase its focus on its website. Last quarter, Staples said it would close 225 stores in North America. Even though it guided earnings of $0.17 – $0.22 per share (the consensus was $0.27) in Q2, its online site holds promise. Revenue grew in the double digits in Q1. The firm is fighting to differentiate itself from Amazon (AMZN) by partnering with 3D Systems (DDD). It will offer 3D printing services for small businesses in store on Fifth Avenue, New York.

2.     J.C. Penny (JCP)

Added on Morgan Stanley’s list of potential takeover targets, J.C. Penny continues to turnaround its business. In March, the company relaunched its home goods department. J.C. Penny could be regaining lost customers from its competitor, Target (TGT), after the retailer’s public relations disaster involving the compromised information of 70 million customers.

3.     Sears Holdings Corp. (SHLD)

Shares of Sears Holdings were on a path to recovery, peaking at $50 but then breaking down and closing at around $32.60. Sears is planning to launch a line of clothing for teens. Sears has tremendous book value, helped by its real estate holdings. The problem with Sears is with its latest foray into its “softer side.” It will be very difficult for Sears to compete with more nimble and trendy companies like American Eagle Outfitters (AEO) or Aeropostale (ARO).

Comparable Retail Stocks

Conclusion

Investors should not correlate the stock market decline with an economic decline. Retail spending is recovering, albeit slowly. J.C. Penny could emerge stronger as it improves its retail mix and returns to its roots.

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