Specialty Retail Stocks Defy Gravity

Tough comps and the threat of the Fed can't keep the sector down Wednesday.
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Despite considerable sector headwinds, the specialty retail space ignited Wednesday after one of its biggest names --

Pacific Sunwear

(PSUN)

-- was said to be getting cheap.

BB&T Capital Markets analyst David Turner said that at around $20, shares of Pacific Sunwear are at an attractive entry point, and he lifted his rating on the company to buy from hold. He also set a 12-month price target of $26. "A potent fundamental story and earnings visibility are still very much intact," Turner wrote in a research note.

Shares of Pacific Sunwear were lately up 60 cents, or 2.8%, to $22.14 in midafternoon

Nasdaq

trading. The shares currently cost about 17.5 times this year's forecast earnings and 15.3 times 2005's consensus.

Turner said the stock's valuation has contracted about 15% since reaching a year-to-date high in mid-February. The stock closed at $25.50 on Feb. 10, up from $20.79 on Jan. 2.

Turner also noted that the company has a "unique growth vehicle" in its d.e.m.o. brand as well as in its young men's business, and he sees both as potential catalysts.

Most retailers are facing more difficult monthly same-store sales comparisons in the latter half of the year than they have thus far. That, as well as a sense that a hike in interest rates by the

Federal Reserve

would hurt consumer stocks, creates risk for the group, Turner said. Pacific Sunwear has among the hardest same-store sales comparisons of the retail sector in July, August and September; in 2003, it posted same-store sales increases of 15.1% in July, 15.6% in August and 18.5% in September.

The analyst thinks, however, that the chances those issues could hurt Pacific Sunwear are smaller than at other retailers. "We believe the company's seasoned management team, differentiated concepts and sterling execution will minimize additional downside," he said.

Turner also lifted his first-quarter EPS estimate to 17 cents, a penny ahead of the Wall Street consensus. The company earned 11 cents a share in the year-earlier first quarter. Pacific Sunwear reports first-quarter earnings on May 10.

Shares of several other specialty retailers were rising.

Sharper Image

(SHRP)

was surging $1.53, or 5.5%, at $29.58;

Jos. A. Bank

(JOSB)

was up $1.27, or 4.1%, at $32.07;

Hot Topic

(HOTT)

was lately adding 68 cents, or 3%, at $23.21;

American Eagle

(AEOS)

was up 69 cents, or 2.6%, at $26.88; and

Aeropostale

(ARO)

was rising 53 cents, or 2.3%, at $23.59.

In contrast, the

S&P 500

Retail Index (RLX) and the

Retail HOLDRs

(RTH) - Get Report

index were both down slightly. The S&P's Retail Index was lately down 3 points, or 0.1%, at 392.85, off its all-time closing high of 404.44

reached on April 27. The Retail HOLDRs index was down 6 points, or 0.07%, at 91.17.