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Why Heller Is Bullish on Fashion Retailer Cato Corp.

Despite a dismal year for the industry, the company has boosted its dividend and the stock is at a 3-year high.

Fashion may not be on the mind of everyday traders, but Real Money’s Jonathan Heller says this retailer walks the runway walk.

“Shares of fashion retailer Cato  (CATO) - Get Cato Corporation Class A Report are continuing to get the job done as Friday's [Nov. 5] 5% rise put the stock at a three-year high,” Heller wrote recently in Real Money. “This name has been a value investor’s dream — out of favor industry with loads of liquidity, no debt, improving operations, nice dividend, and real estate, with no analyst coverage. Sometimes names such as this fall under the radar, unnoticed and unappreciated.”

While it's difficult to think of a more competitive and potentially worse business than fashion retail, Cato is profitable, currently trading at about 19.5x trailing 12-month earnings, and has maintained a very solid balance sheet. 

“The company ended its second quarter (July 31) with nearly $217 million - that's about half of the company's market cap - or about $10 per share in cash and marketable securities, and no debt,” Heller noted.

One reason why Heller is bullish on Cato is its re-emerging dividend.

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“The former 33-cent quarterly dividend was suspended in the early months of the pandemic, but reinstated this past May at 11 cents,” he said. “Three months later it was raised to 17 cents, good for a 3.5% indicated dividend yield. There is reason to believe that the company will continue to increase the dividend -- it certainly has the resources to do so.”

Third-quarter earnings are on the way, but recent financials spell opportunity for investors.

“Second-quarter earnings of 62 cents a share did not disappoint — at least me anyway. After all, there is no analyst coverage, therefore no consensus to weigh in,” Heller noted.

Plus, it's already been quite a year for Cato.

“The company is back in the black, it survived the pandemic in good shape, and shares are up 102% year-to-date, and 182% over the past year,” Heller added.

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