David Sterman

You don't want to be loading up on retail stocks right now. Signs are emerging that the back-to-school shopping season will be lackluster, and the mid-term outlook for the end-of-year holiday shopping season is likely to be equally sobering.

The dim outlook has already been discussed by an increasing number of Wall Street analysts. Earlier this week, for example, Deborah Weinswig, retail analyst for Citigroup, lowered her 2012 profit forecasts for Kohl's (NYSE: KSS), Macy's (NYSE: M), J.C. Penney (NYSE: JCP) and Target (NYSE: TGT). Look for more estimate cuts from other analysts in coming weeks and months.

Yet you may want to keep a very close eye on this sector, because a curious phenomenon is likely to happen again. Whenever investors begin fleeing retail stocks, they often punish them far too much -- at least by one key measure.  I'm talking about their market value in relation to their assets -- especially inventory. On occasion, investors push a stock down so far that it is actually worth less than a company's merchandise. This sets up the bounce back trade as value investors go hunting.

Off-price retailer Tuesday Morning (Nasdaq: TUES) is a great example. The company carries more than $200 million in inventory on its books, and at the start of 2012, the entire company was valued at just $125 million. Investors eventually spotted that anomaly and shares are up more than 80% since late January.


David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com