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Retail Stocks to Buy (or Not) in 2014

Paul Ausick

Buying a retail stock is often a pretty risky venture and it won’t get any less risky in 2014. The stocks can bounce around a lot, especially for those stores that report monthly same-store sales numbers. And retailers are also at the mercy of the overall economy: if gasoline prices rise, for example, customers put off discretionary purchases and delay necessary ones for as long as they can.

The analysts at Sterne Agee have issued some predictions for next year that add some color to the firm’s ratings and price targets. We’ve selected 5 of the 13 retailers in Sterne Agee’s universe to look at in more depth.

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J.C. Penney Co. Inc. (JCP) is the investment firm’s choice to be the biggest stock percentage mover in 2014. Volatility continues to be name of the game here with sales growth still an issue, tight liquidity, a possible CEO change, and valuation challenges. Sterne Agee has Penney as a Buy-rated stock with an upside potential of 13% and a price target of $9.00. The stock’s P/E ratio for 2014 is negative and the earnings per share (EPS) estimate is expected to be down by 62% after rising 70% in 2013. As the analysts say, “Buckle Up!”

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Macy’s Inc. (NYSE: M) is another Buy-rated stock, and Sterne Agee has a price target on the shares of $57.00 yielding an upside potential of 9%. EPS growth for 2014 is expected to be 14% and the stock’s forward multiple is 11.9. Sterne Agee thinks that Macy’s is a likely candidate to offer a free-shipping program on its online platform next year as a better way to engage customers, offer value, and increase loyalty while maintaining market share.

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Costco Wholesale Corp. (COST) has a price target of $143 for an upside potential of 21%. EPS growth is set at 12% and the forward multiple is 23.4. Costco recently upgraded its membership database and Sterne Agee thinks the company will put that upgrade to good use in its multi-vendor-mailing program by mining years of buying habits by its 70 million members.

Kohl’s Corp. (KSS) added two national brands to its merchandise lineup this past fall, Juicy Couture and Izod, and Sterne Agee doesn’t think the company has mined out that field yet and expects it to add three or four new names in 2014 likely in the men’s and athletic wear. Buy-rated Kohl’s has a price target of $51 and the stock is already overvalued by about 7%. EPS growth in 2014 is tagged at 6% and the store’s forward multiple is still just 12.4.

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Family Dollar Stores Inc. (FDO) is rated Underperform by Sterne Agee primarily because it believes the store will slow down its new store openings starting in 2015. The analysts point out that same-store sales have been under pressure and there is some question about the strength of the store’s brand. The Sterne Agee price target on the stock is $56.00 and, like Kohl’s, the shares are overvalued, but by a larger percentage -- 12%. Estimated EPS for next year is down 2% and the forward multiple is 17.1.

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