Talbots

On 7-December Talbots (TLB) released third quarter results, and very disapointing forth quarter guidance. They now expect that they could see a loss of 5 cents per share. This verse and average analyst forecast of 14 cents earnings per share. While income was up in the third quarter to $17M vs. $15.5M a year earlier, the earnings per share were down to 24 cents vs. 28 cents a year earlier.

All this seems to point to a company going down the wrong path, and that could well be. Never the less, I have purchased Talbots (TLB) today at $8.70. There are a few reasons for this which I will detail below.

First reason: The easy pickings that have been around in the dividend stocks are not looking so “easy” any more. Many of my favorite dividend stocks are near or at 52-week highs (see the whole oil industry). This does not seem like the right time to add to those holdings, or to find an entry point into a great stock like ConocoPhillips (COP). This is even more true in the preferred stocks, most of the great yield preferreds are now over their issue price, thus taking away some of their appeal.

Second reason: It’s time to try to look at some stocks that might “pop” and produce some good growth. Many of those stocks have already had big breakout years. And while TLB is down ~25% since the bad earnings, it is only down 3% on the year. During this year Ann Taylor (ANN) is up 104%. Perhaps ANN is a better pick, but with a 104% run-up this year I have to think the better chance for a “pop” in the next 6 months is TLB.

Third reason: US retail appears to be on the brink of a comeback. So far none of the indicators show anything as strong as the pre-recession years, but we still have 10% unemployment. My bet is that if unemployment starts to level off, and the economy starts to pickup, then we could see a “pop” in retail. This might be just as good an argument to buy ANN by saying it should see continued strength.

So is Talbots the right retail play? I think if my main objective here is long-term steady growth, then perhaps not. However I hold lots of long-term steady growth plays, and that is not what I am looking at here. For a ‘bang for your buck’ retail play that has a good chance of making a “pop” in the next 6 months, I think TLB is the right play. Let’s face it, everyone is planning for them to fall on their face. Even if they just stumble across the line there may be gains to make. And if they are really able to turn the ship around, and get back on a track to strong profitability, then there may be big gains to be had.