Maybe it's time to buy into Aeropostale Inc. and Abercrombie & Fitch Inc., whose shares have suffered this year.
Jefferies retail analyst Randal Konik says a specific metric is signaling that it's time to buy stock of the two teen retailers: The ratio of the companies' market capitalization to their annual sales.
"In our experience, market cap/sales ratio is one of the most telling indicators of value in the specialty retail space," he wrote in a note to clients Thursday.
Abercrombie & Fitch's market cap is $3 billion compared with a revenue forecast of $5 billion for fiscal 2014. Aeropostale's market cap is $1 billion compared with a $2 billion in revenue estimated for fiscal 2014.
He said Abercrombie & Fitch and Aeropostale could see more gains going forward than rival American Eagle Outfitters Inc., whose market cap of $4 billion is bigger than its revenue forecast of $3 billion for fiscal 2014.
There are other factors too. Konik says that Aeropostale's stock has already been punished for its weak second-quarter earnings results, which were dragged down by heavy discounting during the back-to-school season. Aeropostale's shares are down 33 percent since late July.
Konik predicts less pressure on prices in the second half as retailers keep fewer clothes on stock, especially rival Abercrombie & Fitch, whose shares have lost 29 percent of their value this year.
"The worst is over" at Abercrombie, Konik says. The retailer may be bouncing back from some problems in the first half of the year, which included the weak European economy hurting sales abroad, competition from its own stores hurting its sales in other stores and heavy discounting in the U.S. He said the company has slowed openings of its flagship stores and lowered spending, helping stabilize the international business.
Abecrombie & Fitch's shares gained 44 cents to $35.14 in premarketing trading Thursday. Shares of American Eagle and Aeropostale's shares were unchanged before the opening bell.
