When it comes to earnings reports, the stock market herd has a tendency to crumble into an irrational panic over the slightest bit of negative news.
But that's great for investors who are paying close attention. It gives us a chance to capture some easy profits from a market mistake.
That's the case with our stock to buy today, a retailer that has fallen nearly 20% since its last quarterly report in late July.
Despite the stock drop, the report was actually strong. Earnings per share (EPS) beat expectations by 39%. The company said it's also on track to grow earnings by 12% over the fiscal year.
But analysts had put unrealistic expectations on the company.
One of its top competitors had just announced it was closing all its stores. So analysts expected this company to scoop up its competitors' sales faster than it did.
Never mind that the competitor was still holding final liquidation sales for much of the quarter.
This is a classic market overreaction. As a result, we can grab a quality retailer at a steep discount.
In fact, our stock to buy is now trading 15% below where it was when the competitor first announced it was shutting down.
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Even better, this stock was undervalued before panicky investors started scrambling for the exits. Now that it's available for even cheaper, it's an outright steal.
That's one of the reasons it earned a top score from the Money Morning Stock VQScore™ system, indicating that it's due for a rise.
But it's not going to be available at such a low price forever. So you'll want to grab it soon.
This Dominant Player in Kids' Apparel Is Getting Even More Market Share
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Carter's Inc. (NYSE: CRI) has been in the kids' clothing business since 1865. With 1,050 retail locations and $3.5 billion in annual sales, it is one of the powerhouses of its industry.
It also owns OshKosh B'gosh, probably one of the most famous and successful brands of children's apparel there is.
Now, you might be wary at the thought of a traditional retail stock in the Amazon age. But children's apparel is one of those specialty retail markets that is largely resistant to the Amazon effect.
That's because kids don't just need a few new shirts or a new dress now and then, items that can easily be ordered online. They need entire new wardrobes periodically as they grow in size.
Online shopping loses its convenience factor pretty quickly when you factor in the volume of shipments and returns that are necessary for parents outfitting their kids. One trip to the store to grab all those items off the rack and confirm the size before buying is the easier option.
Beyond that, Carter's is about to grab an even bigger share of its market. Both the main Carter's brand and OshKosh have recently increased their biggest sizes, and another increase is coming this fall.
Bigger sizes means clothing for older children. That means it doesn't have to worry about appealing to a new audience. It simply needs to appeal to the same parents and children as they grow a few years older.
In other words, with Carter's we've got a solid company in a strong market. And it's actively expanding its profit potential.
So why the pullback?
In March, Toys "R" Us announced it would be closing all its U.S. stores. That included its Babies "R" Us apparel stores that compete directly with Carter's.
So it makes sense that investors would expect this to be a positive for Carter's. And by the time the next quarter's report came out, CRI's stock price was up by 5%.
But when the sales boost hadn't shown up yet, the stock fell 20%.
Now, as we've already mentioned, Babies "R" Us was still in liquidation during that quarter, with many locations offering discounts of up to 70% on all merchandise. So it was a little early for investors to panic that customers hadn't switched allegiances yet.
But even if we ignore that, the missing sales boost certainly didn't warrant anywhere near 20% drop in CRI's value.
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The drop tells us more about the market's anxiousness than about the appeal of Carter's. But again, that oversight by the market is good for us. It leaves us with a great stock at a great price.
And now, when former Babies "R" Us shoppers do start flowing into Carter's, it will be a bonus for those who got in now.
To see just how misguided the market was, we just have to look at CRI's numbers...
Every Metric Says Buy CRI Now
When it comes to earnings growth, Carter's is about as reliable as they come. EPS has risen every year since 2011 and has more than tripled in that time. According to FactSet, that growth streak is projected to continue at least through 2021.
And while you may have heard of retail chains closing stores all across America, the trend for Carter's is the opposite. Since 2008, Carter's has increased its number of stores in eight out of nine years, going from 418 to 1,050 in that time.
The performance of those added stores has been consistent too, as evidenced by sales growth from $1.49 billion in 2008 to $3.4 billion in 2017.
This hasn't escaped the notice of Wall Street either. According to FactSet, CRI's average rating among analysts is "Overweight," with price targets as high as $138. That would be a 46% gain from its current price.
Its value metrics also confirm that it's undervalued. CRI's trailing price/earnings (P/E) ratio is 15.24, compared to a 20.70 industry average. Its forward P/E ratio is 13.8, compared to an industry average of 18.33.
The stock's price-to-book ratio, measuring its stock price against its net asset value, comes in at a 10% discount compared to its peers.
And both the trailing and forward price/earnings-to-growth (PEG) ratios suggest that Carter's is due for a rise, with the trailing PEG ratio suggesting a nearly 50% rise.
Again, all that is before you factor any new customers coming from the closure of Babies "R" Us and from the coming expansion in available sizes.
On top of that, CRI offers a 1.9% dividend yield, which is 26% better than the industry average.
So now's the time to grab this gem that the market has foolishly discarded. You can go for the quick gain as it rebounds or hold it for the long term as it continues to grow.
Either way, you should be rewarded handsomely.
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About the Author
Stephen Mack has been writing about economics and finance since 2011. He contributed material for the best-selling books Aftershock and The Aftershock Investor. He lives in Baltimore, Maryland.