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Why J. Crew Should Be Dressed Down

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The retailer beat estimates, but how far can this go?

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It was an interesting ride home yesterday. Let's just say that the fellow next to me learned a hard lesson that a Venti Starbucks coffee coupled with a white shirt and a bumpy bus ride don't mix. Fortunately only my shoes got nicked after his barrel full of caffeine went splashing about the cabin.

Both the Hang Seng and the Nikkei closed essentially flat. European stocks were up a smidge early this morning. And here in the US we're currently trading higher.

Here's what I'm focused on:

J. Crew Group
(JCG):
Is perhaps a little dressing down in order after the company's fourth-quarter results?

After the bell last night, the retailer reported a fourth-quarter profit of $0.61 a share, which was a country mile more than the $0.46 a share analysts had been looking for. Improving gross margins helped juice the quarter.

Moreover, the company indicated that for the first quarter it's looking for $0.48 to $0.53 a share, which is swell because the Street is at just $0.48.

So here are my thoughts:

1. The company has clearly been performing, thumping estimates consistently over the past year or so, and the stock has been on a rip-roaring tear, as one can see by looking at a chart. But how far can this go? I mean the beats are almost expected and I have to wonder what will happen if the company ever misses or, heaven forbid, releases some sort of disappointing news.

2. Plus we're now trading at a little more than 22 times this year's estimate. Why should I want to hit the fitting room and try this one on right now? My take in a nutshell is that the shares are overpriced and the upside in the near term is limited despite the better-than-expected results.

3. Although the bulls will likely argue that I'm being overly pessimistic. I should point out that two insiders bellied up and bought stock in the $40s (directly/indirectly) in the later part of last year.

Cisco (CSCO):
I kind of suspected that the whole changing the Internet thing might not end up being that big of a deal for the stock, and it turns out, for better or worse, I was right.

That said, I continue to like Cisco for reasons other than yesterday's news announcement, including its continued ability to thump estimates and its future earnings potential. In short, I view any further weakness as opportunity. Let's let those momentum folks get out. All in all I think this is a $30+ stock within a year's time.

Sonic Corp. (SONC):
Mickey D's (MCD) has been enjoying its time in the sun, but perhaps investors should start paying attention to this increasingly popular burger chain.

The skinny per Justin Sharon is that KeyBanc kicked up its rating to Buy.

My thoughts:

1. Point blank, I am nowhere near as bullish on Sonic as I am on McDonald's or Yum (YUM) and their longer-term prospects in this country and across the pond. But in many markets Sonic locations are a huge hit. And its tasty and cheap food is likely to be in demand in this environment for the foreseeable future. From personal experience I can tell you that the drive-thru chain offers up a nice night out, particularly if you've got kids.

2. If the company is able to put the $0.67 the Street is expecting this year on the scoreboard, I think this is a $10 to $11 stock a year out and maybe a smidge more.

Lockheed Martin (LMT):
Macquarie apparently nudged up its rating on the company to Neutral. Not the most encouraging rating I realize. But perhaps it will garner the company more of the attention it deserves.

Cutting right to the chase at 11 times this year's estimate, a solid history of positively surprising the Street, and a promising future as far as providing Uncle Sam with things that go boom, I think the stock is a swell value.

Have a great day!
No positions in stocks mentioned.

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