ROST: Ross is Working

My latest column is up at RealMoney.

This has been a terrible time to own stocks tied to consumer discretionary spending. The Consumer Discretionary SPDR (XLY) is down more than 16% so far this year. So I’m somewhat surprised to find myself giving serious consideration to a retail stock that is up more than 50% since January.

Ross Stores (ROST) operates more than 900 stores, selling first-quality, in-season, name-brand and designer apparel and housewares at 20% to 60% off the regular prices of department stores and specialty stores. Ross targets value-conscious women and men between the ages of 18 and 54, a demographic that currently includes just about everyone.

After three quarters of exactly matching the consensus estimate, Ross beat its numbers by 2 cents a share in the April quarter. This month the company announced that June same-store sales were up a robust 8% and that total sales were up 15% from one year ago. The company now expects that earnings per share for the 13 weeks ending Aug. 2 will be in a range of 51 to 53 cents, up from previous guidance of 43 to 47 cents and a consensus estimate of 46 cents.

Although Ross has a higher price-to-book ratio than the average apparel retailer, I believe it is justified by the company’s higher return on equity. I don’t see much change in the level of valuation, which means the 15% annual growth expectation would also be my estimate of total return over the next three to five years.

My comfort zone is more in value investing than in momentum investing. To see a stock up so much makes me very nervous. But that doesn’t mean I shouldn’t consider buying it. Just like BJ’s Wholesale (BJ) or the recession diet, the plays on consumer belt-tightening continue to work. Ross is one of those plays. If I get antsy about the price because of the recent strength, I could always put in some tight stops or buy some out-of-the-money puts for downside protection. Meanwhile, it’s hard to argue with a stock that is working when so few are.Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.