In the past year, I've been keeping a close eye on a specific group of stocks that could really take off when the economy improves. The stocks all toil in the retail sector, and they've all stumbled badly as a result of the reduced sales during the economic downturn. But while investors continue to shun the retail sector, management has been making the right moves to fix what's broken -- so much so, that their just-released quarterly results show a much-improved picture.
With shares trading at bargain prices and the bullish prospect of a strengthening economy, this might be the perfect time for value investors to enter the retail scene. These three names are my top picks...
1. RadioShack (NYSE: RSH)
In late June, I suggested this electronics retailer was poised for a comeback in the second half of the year. I have consistently marveled at the company's solid cash flow, even as the retailer has lacked any new hot products that could drive foot traffic.
Well, RadioShack may have just found the right bait. The company is dropping its sales contract with lagging wireless service provider T-Mobile, replacing it with industry leader Verizon (NYSE: VZ), which has a 43% market share. The change, which goes into effect in mid-September, should yield an immediate and tangible upturn in traffic to its stores. The potential advantage of increased traffic is that customers can come in to activate, renew or upgrade phone service, and leave the store with a number of accessories.
Shares initially surged on the news in the last week of July, but have since cooled off again. They remain a verifiable bargain, trading for less than four times projected 2011 EBITDA (earnings before interest, taxes, depreciation and amortization) -- even as the Verizon benefit will really only be limited to just one quarter this fiscal year. If the Verizon deal drives more traffic, as I suspect, then 2012 results are likely to be even more robust.
Analysts at Goldman Sachs are on the same page, having added RadioShack to their "Conviction Buy List," early this week.