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(True) Religion Sells: Under the Radar

True Religion has a big advantage over other clothing retailers: high prices on inexpensive denim.

VERNON, Calif. (TheStreet) -- True Religion's (TRLG) shares more than doubled during the past year, but the luxury-denim retailer is still undervalued.

Selling clothes with premium price tags was no easy task in the early days of the recession, but now many of the stocks that were hit hard by the fallout in consumer confidence are roaring back to life.

True Religion

sells clothes through its Web site and in a handful of specialty stores as well as through high-end department stores like


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Saks Fifth Avenue




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Bloomingdales and

Urban Outfitters

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True Religion jeans sell for as much as several hundred dollars, and those exorbitant prices have led to fat profit margins. Over the trailing 12 months, the company has posted a return on equity of 28%, with an operating margin of about 25% and a profit margin of 15.2%. Competitor

Polo Ralph Lauren

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has a margin of about 8.4% with a return on equity of 14.2%.

Despite the run-up in its share price, True Religion is still a steal. The company has a PEG ratio (measuring price-to-growth prospects) of 0.45 and a forward price-to-earnings ratio of 11.9 versus an industry average of 25.5. True Religion is secure, with no long-term debt and an astonishingly high current ratio of 8.8. Higher interest rates on the horizon, creating wide spreads and a high cost of borrowing, will be a non-issue for the company.

True Religion is a cash-making machine that can generate growth without borrowing. In 2009, the company posted about $46.4 million in free cash flow, up from $30.8 million a year earlier. Analysts project revenue will grow 16% this year and 13.8% in 2011.

Fashion can be a fickle business, but True Religion has found the right mix. Its duds' massive price tags may seem unreasonable to some, but the fashion-conscious young adults the company targets aren't balking at the proposition of paying $106 for a T-shirt with the phrase "old bikers" on the front and "never die" appliqued on the back.

Those preposterous sayings are welcomed by True Religion investors. The drive for fashionable apparel has made the stock a bit of a gold mine. You may not want to dress like an extra from

The Hills

, but there's nothing wrong with profiting off those who do.

True Religion gets a "buy" rating from Ratings'

model, with a grade of B. Don't let the run-up scare you. True Religion may have some legs left.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.