Washboard Abs & Profits to Match: Is It Time to Invest In These Apparel Stocks? – The Gap Inc. (GPS), American Eagle Outfitters (AEO), Abercrombie & Fitch Co. (ANF)

Published on March 12, 2013 at 4:47 pm by The Motley Fool in News

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An achievement gap

The undisputed king of blue jeans and suburban sweaters is, of course, The Gap Inc. (NYSE:GPS) , with its market cap of $17.06 billion. Yet they, too, are flagging. Sales have increased by an average of nearly 11% per quarter over the past four quarters, yet cost of sales have increased by a concomitant 13%. Yes, at the level of profit The Gap Inc. (NYSE:GPS) brings in, this is still a huge increase in absolute dollars, but this reveals increasing inefficiencies in the company’s sales strategy. Long-term investment begins to grow murky.

The Gap Inc. (NYSE:GPS)’s current ratio of 1.7 is not unhealthy, per se, but with long-term debt jumping sharply over the past two years, what growth they have managed becomes suspect. Overvalued at a PEG of 1.29, The Gap Inc. (NYSE:GPS)’s growth seems unsustainable.

Long term versus bargain investing

With PEGs looking about even growth-hunters might be loath to invest in these stocks, but the PEG ratio isn’t the crystal ball some make it out to be. More concrete measures of financial health like current ratio and gross profit are certainly better measures of a long term, healthy investment. By this measure, AEO is the safest investment, though perhaps not the most exciting. If you’re investing for the adrenaline rush, though, you may want to take up mountain biking.

Overall, mind the dividends each of the aforementioned stocks provide. While bargain-hunting may be a moot point with these apparel companies, a portfolio could do worse than hold to slowly-expanding companies with strong dividends rolling in. For the short term, keep an eye out.

The article Washboard Abs & Profits to Match: Is It Time to Invest In These Apparel Stocks? originally appeared on Fool.com and is written by T. M. Loyd