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Tickers in this Article: TIF, ANN, ARO
Many retailers have been cutting their estimates and investors have been selling shares in the stocks thinking that any slowdown in consumer spending will affect the group as a whole. While shares have dropped considerably it is clear that there are good trading opportunities in retail from a fundamental basis. To profit in this volatile sector, we must go into the companies at the right time and ensure that they have solid valuations behind them. (To learn more about this cornerstone of investing, read our Fundamental Analysis Tutorial.)

Three stocks that come to mind as potential candidates include: Tiffany & Co. (NYSE:TIF), Ann Taylor Stores (NYSE:ANN) and Aeropostale (NYSE:ARO).

Tiffany Vs. Ann Taylor: Which is Best?
Shares of Ann Taylor are showing signs of good entry points. The big question is how do we know they are not going lower? Answering this question requires examination of the fundamentals. Ann Taylor is trading at a price earnings ratio of less than 9, compared to the overall apparel industry average price earnings ratio of over 10. It has $107.80 million in cash and no debt. These are great valuations.

Meanwhile, Tiffany & Co. is more questionable. It has a price earnings ratio of less than 10, compared to the retail industry average of nearly 18. The company has $152.16 million in cash and $639.19 million in debt. What all of this is telling is that Ann Taylor is liquid enough to ride out any storm in retail, while Tiffany looks like it could have more difficulty riding out the storm. (To learn more, read The Essentials Of Cash Flow.)

Aeropostale Looks Compelling
The markets weakness has brought shares of retailer Aeropostale to compelling levels. The company is currently trading at a price earnings ratio of just over 10, which is better than the overall apparel industry average of just under 10. It has $70.79 million in cash and no debt. What all of this means is that we have a great retailer with a strong balance sheet and not overpriced from a valuation standpoint. It would not be surprising to see the company survive and become stronger.

Bottom Line
By looking at the fundamentals, we can find great valuations over the long term. The best way to find a diamond in the rough is to compare companies against their peers and the industry average. Look for those companies that stand out, then do your research to discern whether there is a reason for the lower valuation, or if there is somehting the market has missed.

To learn more about this sector, check out Analysing Retail Stocks.

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