Wall St. Week Ahead: Cheap clothes makes for pricy stocks at TJX, Ross

Fri Aug 12, 2016 11:43pm EDT
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By Rodrigo Campos and Nandita Bose

NEW YORK (Reuters) - Consumers are flocking to discount apparel retailers, but investors are faced with nothing close to a bargain as stocks in the sector rally.

Few expect shares of off-price retailer TJX Companies' (TJX.N: Quote) or its peer, Ross Stores ROST.O, to go on a fire sale next week when they report earnings, as the trends that have favored them over their higher-priced competitors are expected to persist.

Just this year, TJX shares have gained nearly 17 percent and Ross Stores has added slightly more, compared with gains closer to 7 percent in both the S&P 500 retail index .SPXRT and the broader S&P 500 .SPX.

"TJX and Ross have outperformed and will continue to outperform because they are good merchandisers. They get the selection right,” said Kim Forrest, senior equity research analyst Fort Pitt Capital Group in Pittsburgh.

"I don’t own these and I regret it," she said, adding that she will wait for a stumble in the price to jump in.

Contrary to the discounts shoppers find at TJX and Ross, investors are faced with a high price for their shares. At near 22 times expected earnings over the next 12 months, their price-to-earnings ratio is at its highest level in at least 15 years, according to Thomson Reuters Datastream.

Both stocks set record closing highs on Friday ahead of TJX's quarterly report due Tuesday. Ross is expected to report on Thursday.

But the stock gains could continue, as sales are expected to continue to grow and investors welcome the revenue increase. Same-store sales are expected to have risen 3.3 percent last quarter for TJX and 2.1 percent for Ross, according to Thomson Reuters data.   Continued...

Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., August 9, 2016. REUTERS/Lucas Jackson