Harry Domash's Winning Investing



Retail Clothing Turnaround Candidates

Trade war fears have hit many stocks hard this year. But news that President Trump and Chinese President Xi Jinping have agreed to meet at this week’s G-20 Summit in Japan gives us hope that the two leaders would get along well enough to prevent the U.S. from implementing threatened tariffs on Chinese imports.

Clothing Stores Hit Hard

Retail clothing stores, a category that imports most of its merchandise from China, has been hit harder than most by the tariff threats. In fact, despite the relatively strong stock market, many apparel retailers have suffered double-digit share price drops this year.

Screen For Rebound Candidates

While predicting the outcome of next week’s U.S./China meeting is beyond my pay grade, I’m going to describe a stock screen that you could use to pinpoint retail apparel stocks likely to rebound should the talks go well. As usual, I’ll use the user-friendly and free finviz stock screener to describe how to find worthwhile candidates.

Start from the finviz home page (https://finviz.com), and then select “screener” (top menu) to access the screening program. You program the screener by defining “filters” to pinpoint stocks meeting your requirements. Select “All” on the filter bar to see the available filters. Use the dropdown menu next to a filter name to specify values for filters that you want to use.

Candidate Universe

We’ll start by isolating U.S.-based clothing stores stocks that have seriously underperformed the market so far this year. Use the Country dropdown menu to select USA, the Industry menu to specify “Apparel Stores” and finally the Performance menu to require that passing stock’s share prices must be down at least 10 percent so far this year (YTD – 10 percent).

Profitable Wins

Since focusing on profitable stocks always yields the best results, we’ll use “return on equity (ROE),” a widely-used profitability gauge, to find them. ROE compares a firm’s annual earnings to shareholders equity (assets minus liabilities) and can only be a positive number if the firm has generated positive recent earnings. Use the Return on Equity menu and select “positive.”

Work Smarter - Not Harder

Institutional buyers include mutual funds, banks, pension funds, etc. These big players have access to information that we’ll never see. So, rather than analyzing financial statements, we’ll adopt a “work smarter, not harder” strategy and limit our list to stocks that institutional buyers like. Specifying “over 80 percent” for institutional ownership requires that for passing stocks, institutional players hold at least 80 present of outstanding shares.

Stock analysts spend their days deciding whether the stocks that they follow should be bought or sold. finviz sorts their advice into five categories; strong buy, buy, hold, sell, and strong sell. Again following the “work smarter” theme, Using the Analyst Recommendation menu, specify “buy or better.”   

Four Candidates

My screen turned up four beaten-down turnaround candidates. Click here to see the stocks that the screen is turning up today.

American Eagle Outfitters (AEO): Operates 1,000+ American Eagle and Aer clothing stores in the U.S., Canada, Mexico and Hong Kong.

Citi Trends (CTRN): Operates 500+ value-priced clothing stores in 31 states.

Shoe Carnival (SCVL): Operates 400+ shoe stores in the Midwest, Southern, and Southeast regions of the U.S.

Urban Outfitters (URBN): Operates 240+ Urban Outfitters stores, and 225+ Anthropologie stores in the U.S., Canada, U.K., and 11 other countries.  

As is always the case, consider the stocks listed by my screen to be research candidates, not a “buy” list. The more you know about your stocks, the better your results.

published 6/24/19

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