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Companies Cut From A Different Cloth

By James Brumley

Tickers in this Article: GIL, TRLG, COH, CROX, ICON

It hasn't been too hard to find a decent stock lately; there's some truth to the old adage that a rising tide lifts all boats. However, although this has generally made investors' lives easier, it's still advantageous to maximize this bullish wave by finding the "best of the best" industries. One way to do this is to find an industry that appears to be outperforming the market overall and then picking the most promising stocks in this industry.

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Based on this strategy, some of my intermediate-term favorites are textiles, clothing and footwear. If you can wear it, I may be willing to invest in it right now.

Let's take a look at the companies I came up with by comparing their relative performance over a handful of time frames. They were not necessarily the top gainers; they were among the top gainers, but their stocks and stories supported the gain more than better-performing groups.

In The Beginning …
I'm a fundamentalist as well as a technician. That just means I understand the value of a company's reports, but also acknowledge that a stock's chart can tell you when the time is right to buy or sell. I say that so you'll understand the process I used to come up with this group of stocks.

The following comparison provides some perspective. While the S&P 500 has done well since its March 17 low by gaining about 8%, textiles and footwear stocks have done considerably better with the Dow Jones U.S. Clothing & Accessories Index gaining 17% and the Dow Jones U.S. Footwear Index gaining 11%.

When cross-referencing the results from the stocks in these indexes with the results (and trends) from the underlying companies, I remained impressed, although I found the average textile/clothing stock to be a little expensive, with a price-to-earnings reading (TTM) of 30. I mean, these aren't tech stocks for cryin' out loud. Still, I found some interesting undervalued ideas. We'll look at those in a second.

As for footwear, I found the typical price/earnings multiple (TTM) to be quite palatable, at around 18.

Satisfied I'd find some bargain stocks with upside potential, I continued to drill down into both groups. Here's the cream that made its way to the top. (For more on industry analysis, check out The Industry Handbook - The Retailing Industry.)

Footwear and Accessories
You know, I almost have to feel sorry for CROCS Inc. (Nasdaq:CROX). Based solely on the numbers, it would be easy to fall in love with this company. But despite its price-to-earnings multiple (TTM) of 5, the stock can't find any buyers. What I, and apparently the rest of the market, can't shake is the sense that the fad is getting old.

Coach Inc. (NYSE:COH), on the other hand, is the kind of company I could get excited about. It's a little more timeless than CROCS and the company is driving some great results, like four straight quarters of year-over-year top line growth, and three years of bottom-line growth. In its most recent quarter, net sales rose 19.1% to $744.5 million. Net income was $162.4 million, a gain of 8%, which beat analysts estimates of 45 cents per share by one cent.

The other attractive name I found in this group was Iconix Brand Group Inc. (Nasdaq:ICON). What's not to like about an average net profit margin of 30% every year for the last three years? The company's first quarter net income is up 43% to $18.2 million and revenues increased 81% to $55.7 million. On May 1, the company announced that it will be entering into a joint venture with Novel Fashion Holdings Limited, which is based out of Hong Kong.

Textiles and Clothing
As far as clothing manufacturers were concerned, despite recent gains for these stocks as a whole, spotting a true bargain company was a little more elusive. Most everything is either too expensive, or not profitable enough. However, I did find a couple of interesting ideas.

True Religion Apparel Inc. (Nasdaq:TRLG) may not seem all that compelling at first glance. A longer look, though, may reveal a company that is just now coming into its own.

On Tuesday April 29, due to an extension, the company reported that its fourth quarter profits had doubled on a 74% increase in revenue to $52.7 million. Analysts are warming up to the company. If Morgan Keegan's recent upgrade, from market perform to outperform, is an early omen, other firms could jump on the bandwagon soon. On May 8, the company plans to release its first quarter earnings.

The only other real undervalued contender I came up with on the clothing side of the industry was Gildan Activewear (NYSE:GIL), a company that lowered its guidance on April 29, and then saw its stock get punished afterward with a fall of almost 31% to close at $24.93. The company's forecast was reduced as a result of production problems with its factory in the Dominican Republic, and losses due to inventories of discontinued product lines. The stock price closed on Friday at $26.09.

That's the attraction here – the bad news appears to be fully priced in, but it's an issue that can be solved. The company's longer-term potential is still intact.

Bottom Line
By looking at an industry that, overall, seems to be outperforming the market and then further examining eye-catching stocks, you just might find some obscure strength. These promising stocks might not be top gainers, but they have a good shot at being able to maximize the bullish wave. (For additional reading, look at Relative Valuation: Don't Get Trapped.)

By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

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