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Why I am Super Bullish on Retail

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July 07, 2011 – Comments (2) | RELATED TICKERS: CTRN , ARO , AEO

Fools,

I love analyzing retail companies-- always have. Everyone has their favorite areas of investing and this happens to be mine. That doesn't mean I do not look elsewhere-- after all, I do consider myself a generalist. I just happen to have a sweet spot for great retail concepts.

I bought a big position in ARO a few months ago. It has tanked some 30%. I was clearly early. I still think that over the long-term that ARO is worth more than my cost basis and is setup for a huge run. Most retailers I am looking at look cheap right now. My other favorite is Citi Trends (CTRN)-- I just recently bought a position. (For my thoughts on both companies, checkout my CAPS pitches).

One of the reasons I like retail right now is that I think margins are at a cyclical trough due to the high price of cotton that has hammered gross margins. However, this is a temporary issue. Cotton is a constant cost commodity-- prices can rise in the short-term based on yields, weather, etc. but in the long-term, if prices are unusually high, farmers simply make more cotton and we get a reversion to the mean. The following SA article does a good job of explaining why cotton should come back down:

http://seekingalpha.com/article/278381-easing-cotton-prices-could-give-aeropostale-s-stock-a-big-bounce?source=yahoo

I also read a great article in the recent ValueInvesting Insight in which one of the managers said that cotton prices were a huge bubble set to burst. I tend to agree- and that's one of the reasons why I own shares of CTRN and ARO.

Fool On,

 XMFConnor

2 Comments – Post Your Own

#1) On July 07, 2011 at 3:24 PM, davejh23 (< 20) wrote:

Margins being at a cyclical trough may not mean anything since stocks don't seem to be trading on fundamentals right now.  Investor margin usage is near all time highs and mutual fund cash levels are at all time lows...the price of cotton could fall 90%, retailer margins could soar, but the stocks could still tank.

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#2) On July 07, 2011 at 3:33 PM, XMFConnor (97.99) wrote:

davejh23,

In the short-term, I suppose that is possible. I am a long-term investor, however, and in the long-term, prices should reflect fundamentals. If margins were to rise and prices fall, that would simply represent a better buying opportunity for patient investors.

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