This Beaten-Down Retailer Has 66% Upside

By StreetAuthority | Updated July 25, 2014 AAA

Trends are everything in the fashion world. What's hot one summer will almost certainly look outdated by the next -- when it's been priced to move.

Investors know a little something about trends, too -- along with buying the hottest stock versus the one on sale. Value investors pride themselves on finding out-of-favor companies selling at discounted prices and holding them until the market realizes the stock's intrinsic value. They also know that all trends, no matter which way it's heading or how strongly it's moving, eventually reverse direction.

One small retailer has had a tumultuous year, dropping nearly half its value. Disappointing first-quarter earnings didn't help investors' confidence, sending the stock down as much as 10% in a single day.

Yet considering that consumers are spending more as the economy picks up its pace, and industry competitors are making bold acquisitions in anticipation of growth, there's clearly more to the story here.

New York & Co. (NYSE:NWY) is a $219 million woman's fashion and apparel company with about 500 retail locations and a growing e-commerce base. The company has incorporated many celebrities into its marketing efforts over the years, with its latest a clothing collection in conjunction with actress Eva Mendes. Established in 1918, the company has weathered financial difficulties in the past -- and a look at its financial statements shows promise.

NWY trades at a forward price-to-earnings (P/E) ratio of just 11.6 times next year's expected earnings, with expecting growth in earnings per share (EPS) of 128%. The company has zero long-term debt, and current assets of $177 million outweigh liabilities of $165 million. In April, research firm Janney Montgomery Scott upgraded the stock from a "neutral" rating to a "buy," but the stock has continued its steadily decline.

Competitor Men's Warehouse (NYSE:MW) recently agreed to acquire JoS. A. Bank (Nasdaq:JOSB) for $1.8 billion, prompting two analyst upgrades from "neutral" to "buy." In my view, the combined company's outlook on the retail sector is indicative of the growth potential for New York & Co. MW should perform well, but doesn't look quite as discounted as NWY.

Future growth is expected to be driven mainly by New York & Co.'s e-commerce segment, which is a focus for management. Digital marketing initiatives aim to increase brand awareness both domestically as well as internationally with the inclusion of international shipping capabilities.

Currently, 60% of the company's sales come from its outlet stores. In the long term, New York & Co. plans to expand from 51 outlet stores to between 75 and 100.

The primary driver of NWY's poor first quarter and recent weakness: A dozen stores were closed as part of an optimization program. However, the company is in the midst of a major turnaround, and management's outlook for the second quarter is optimistic. EPS for next year is expected to be $0.16 a share.

Risks to Consider: It may take some time for management to fully implement the turnaround, so the next few quarters could be volatile. A drop in consumer confidence and spending could stifle the turnaround for some time.

Action to Take --> NWY is one of the most undervalued and oversold stocks on the market, based on its relative strength reading of 26. The average analyst price target is $5.80, representing upside of 66%.

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