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Five Reasons Gap Stock Is a Perfect Fit


It's bolted past expectations 4 quarters straight.

Is Gap (GPS) stock a good fit?

You bet. In fact, there's a big handful of things I'm liking about this company. Here's a top-5 list.

1. Early on in the month it painted a pretty picture of what it thinks its second quarter will look like. More specifically, it indicated it's looking for $0.30 to $0.32 in the period, whereas the Street was at $0.28. I like surprises like that, as well as the fact that the company has bolted past expectations 4 quarters straight.

2. Its comps were down in July, which clearly isn't a great thing. But I'm going to take the glass-half-full stance here and say "down single digits" is much better than the "down nearly 30%" that Abercrombie & Fitch (ANF) experienced in July.

3. Call this company "butter" because this stock has been on a roll, bouncing nicely off its lows. If it can knock out a new high, the stock could go to the mid-$20s.

4. Actually the mid-$20s is where the stock would be more fairly valued. Note that it currently trades at just under 14 times this year's estimate. Yeah, I know: Ben Graham probably wouldn't find that uber-cheap. But keep in mind that Abercrombie is trading at about 38.5 times the current-year estimate and American Eagle (AEO) is at about 18.5 times this year's estimate.

5. This Thursday, the company is expected to release its second-quarter earnings. The estimate I'm seeing is for $0.32. I see the company coming in a penny or 2 north of that number.

With all of this in mind, I do want to offer a caveat.

As I've said in this column recently, I believe a number of high-profile retailers have gotten ahead of themselves. In other words, some of them trade at a silly multiple of expected earnings. (Actually, the market as a whole is looking, shall we say, a tad rich.) If a larger sell-off happens, then the near-term road may end up being a little bumpy for Gap's stock.

Some other retailers I'm hip on (that aren't direct competitors with Gap) include:

(WMT): How can red-blooded Americans not like Wal-Mart? It's got something for everyone on the merchandise front (from paper clips to bikes), and crazy-low prices, which are bound to spur traffic. Not to mention it trades at about 14.4 times this year's estimate. It's just entirely too hard to ignore or pass up.

Target (TGT): It trades at about 14.5 times this year's estimate, which raises my slightly-bushy eyebrows. Interestingly, the estimate for this year got cranked higher this past month. The way I see it, Target and Wal-Mart are absolute no-brainers when it comes to discount retail.

Switching gears just a bit, anyone else out there find the Old Navy mannequins a little frightening?

Hey -- have a great day!
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No positions in stocks mentioned.

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