Editor's note: This Stocks Under $10 alert was originally sent to subscribers Nov. 15 at 2:59 p.m. EST. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.
The holiday shopping season officially begins Nov. 24, the day after Thanksgiving, otherwise known as Black Friday. But the fireworks have already begun in the under-$10 niche of the retail sector, as Reuters reported Tuesday that Danish investor Jakup Jacobsen is preparing a bid to purchase
Pier 1 Imports
The home-furnishings retailer gained slightly more than 20% on the session Tuesday, closing at $7.62. However, the stock, which was recently trading at $7.44, remains about 20% below its June highs, as the company is on track to lose $1 a share in fiscal 2007 (ending February). Even so, Jacobsen, who bought Pier 1's British and Irish stores in March, found value in the retailer's stock at these depressed levels.
In addition to Pier 1,
( EBHI) received a $286 million cash bid from a group of private-equity firms this week.
( GGXY) was also bought out Monday by
Dick's Sporting Goods
for $225 million, or a 20% premium.
With that in mind, we've scoured the under-$10 universe looking for other retailers that could hold value ahead of the holiday shopping season. Our search has turned up an attractive turnaround play, as well as another name that investors should avoid at current levels. We are not taking any action in this Alert.
First up is
( SHRP), a specialty retailer whose shares have recently returned to the single digits where they started the year, despite trading as high as $16.21 in April. The stock closed Tuesday at $9.92, and was recently changing hands around $10.31.
Sharper Image, best-known for its Ionic Breeze air freshener, is currently going through a management overhaul. Founder and CEO Richard Thalheimer stepped down in September because of an options-pricing scandal. Then, just last week, the company's two other top executives, COO Tracy Wan and CFO Jeff Forgan, also abruptly resigned.
Sharper Image is now being run by interim CEO Jerry Levin, who was nominated to the retailer's board of directors this summer by activist shareholder Knightspoint Group. Leven brings experience gained from running other consumer firms such as
Levin will have his work cut out for him, as the company's October same-store sales fell 31% from the previous year. Sharper Image will likely have to close or remodel some of its 190 stores. But despite reporting net losses four of the past five quarters, the company still has a clean balance sheet. With no bank debt and $34.9 million of cash ($2.30 a share), the retailer has a cushion to help finance its turnaround.
We are not adding Sharper Image to the Stocks Under $10 model portfolio at current levels because we already have retail exposure through another under-$10 name. Even so, Sharper Image could trade up toward the teens over the coming quarters as more details emerge about its turnaround strategy.
The other low-dollar retailer that came up on our radar screen is
( GMTN). The seller of outdoor sporting goods is up 59% year to date, recently trading around $9.47. The stock was up more than a dollar intraday Wednesday alone, after reporting fiscal third- quarter (ending October) earnings of 14 cents a share vs. the consensus analyst estimate of 10 cents. But when you subtract a $1.4 million insurance settlement the company received during the quarter, it earned just 4 cents a share.
The stock also benefits from a sizable 1.45 million-share short position. Gander went public in 2004, but about half of the company is still controlled by the founding Erickson family. With just 14.3 million total shares outstanding, that means about 20% of the effective float (excluding the shares held by the Ericksons) is being shorted. Given that about 55,000 shares of Gander trade each day, we believe that the latest rally in the stock has been overdone as short-sellers rush to buy and close a losing position to cover margin calls.
The market's focus will soon shift back to the company's fundamentals, and when it does, Gander's outlook is not rosy. Despite this quarter's gains, the retailer is expected to lose 5 cents a share in fiscal 2007 (ending January). In fact, the company has generated a profit only four of the nine quarters since its IPO.
Gander also has an aggressive store-expansion strategy relative to its financial health. The Minnesota-based company currently operates 105 locations, with plans to open another 15 to 20 during the next year. Even so, the retailer has just $1.4 million of cash, compared with more than $300 million of interest-bearing debt.
Having blown entirely through its $96 million net IPO proceeds and not generating much profit internally, Gander will likely have to seek external financing in the near future to meet its expansion needs.
Given that scenario, the stock could pull back from recent highs, and readers should not chase Gander shares at current levels.
In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes
. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;
to send him an email.