Stocks to Buy Now: These Three Retailers Are Prime Takeover Targets

The wave of deal-making on Wall Street hasn't extended to retail yet. But that's about to change.

That's because retailers make for great M&A candidates - which also makes for some stocks to buy now ahead of this takeover trend.

Takeovers provide chances for companies to cross-sell products and negotiate better with landlords and suppliers. Plus, retailers face low regulatory barriers to deals.

That's why major retailers are among a list of 71 companies Morningstar says are some of the most likely takeover targets this year.

"We think 2013 will bring an uptick of deal activity," said R.J. Hottovy, director of global consumer equity research for Morningstar. "There's no shortage of companies with available capital on their balance sheets and high operating margins, fewer organic growth opportunities and candidates with attractive valuations."

Why Retailers are Struggling

Many retailers have had a tough start to 2013 with consumers feeling the pinch of the higher payroll taxes and rising gas prices, leading to lower consumer confidence.

This has caused retail stocks to perform much worse than the overall market.

J.C. Penney Co. Inc. (NYSE: JCP), for example, has had an abysmal year. JCP fell almost 17% Thursday after reporting a staggering 32% decline in same-store sales for the fourth quarter, and the stock is down 57% in the past year.

While JCP's takeover appeal is limited because it appears to be a sinking ship, others are cheap but still attractive.

In fact, Barnes & Noble Inc. (NYSE: BKS) Chairman Leonard Riggio, and largest BKS shareholder, announced Monday that he wanted to buy the company's stores as sales continue to fall.

And the New York City-based bookseller could be the first in a string of retail takeovers.

Stocks to Buy: The Best Takeover Candidates in Retail

We've gone through Morningstar's list and brought you the three retail companies most likely to be taken over.

Here they are, with a summary of Morningstar's analysis:

  • Kohl's Corp. (NYSE: KSS): Morningstar says Kohl's is one of the few department store retailers that still has growth opportunities, a solid balance sheet and strong cash flows. The fact that its stores are mostly in strip centers that are less unique and sought after also means there is less investment needed to continue expanding, which Kohl's should be able to do with its young customer base. The family-oriented clothing store is down 10% in the past three months and has quite a cheap valuation with a P/E of 10.57.
  • Guess? Inc. (NYSE: GES): The fashion retailer is attractive because it's rapidly expanding its global retail presence and has established a solid distribution network. Guess carries more than $2.00 per share in net cash on the balance sheet and its P/E is 12.30. Guess is up over 10% the past three months to $27.8 and Morningstar believes that a takeover could value the stock above $45.
  • Chico's FAS Inc. (NYSE: CHS): Morningstar views Chico's as one of the most well-known brands among baby boomers and says the store has done exceptionally well reconnecting with shoppers over the past year. Chico's has unveiled two new store concepts, Soma and White House/Black Market, which have helped grow profits and should help fuel future growth. CHS stock has fallen 11% in the past three months and even though its current P/E is slightly higher at 16.3, its forward P/E is only 11.

To get at the ins and outs of Wall Street deal-making, plus hear about six profit opportunities stemming from this "white hot" trend, check out this new deal-making report.

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