Luxury Retail Stocks ‘Too Cheap to Ignore’: Nomura

Bargain hunters could hit the jackpot with a few cheap, oversold retail stocks, according to one analyst on the Street who suggests that investors are overlooking their solid execution of turnaround plans and other signs indicating that they are "getting healthier."

In an interview with CNBC, Nomura Instinet Executive Director and Senior Retail Analyst Simeon Siegel recommended that investors looking for undervalued stocks consider retail brands such as Michael Kors Holdings Ltd. (KORS) and Tiffany & Co. (TIF). While the sector performed fairly better than others during the recent market sell-off, the analyst said that the greater trend this earnings season has been trade unwinds.

"And you think about companies and stocks, hedge funds, mutual funds, that anyone that has been crowded in, those trades have been painful. And there have been a lot of them," said Siegel, highlighting Under Armour Inc. (UAA) and Fossil Group Inc. (FOSL) as examples of stocks that have been crowded out as many investors attempt to make identical bets on them. This week, watchmaker Fossil jumped nearly 80% on earnings results that surpassed consensus estimates, following a Q4 beat by shoemaker Under Armour, whose shares are up nearly 30% since Tuesday. 

Brands Focused on Change

"When everyone makes the same bet and there's a heavily shorted stock, there's a rush to cover," said the Nomura analyst. "When there's a lot of the same bet the trade unwind is more powerful." Instead of focusing on the retailers themselves, investors should buy retail brands with management teams that are embracing change in the disrupted retail landscape, said Siegel. He indicated that the irony is that the brands are becoming retailers in efforts to become more direct with consumers either with their own brick-and-mortar stores or online.

Siegel highlighted Michael Kors as a stock that is "too cheap to ignore," after getting "knocked down on good results." He indicated that the company's earnings results were actually better than people expected in two years. The analyst applauded the luxury retailer's recent initiatives in which the firm has decided to "shrink to grow," pull back on inventory and revamp of its handbag backdrop. A price target of $80 reflects a 24% upside from Thursday close. 

Nomura also likes high-end jeweler Tiffany, suggesting that its strong brand equity and new management team provide a "lot of opportunities to change the way they are running." (See also: Three Big Tech Stocks We Still ‘Love’: Susquehanna.)

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