Williams-Sonoma, Inc. (WSM), Pier 1 Imports, Inc. (PIR), Bed Bath & Beyond Inc. (BBBY): This Retail Giant’s Turnaround Is Real

I like to invest in companies that have been trading near their lows for a long time and are now witnessing a change in public sentiment. Such companies offer compelling risk to reward ratios as they come at an undervalued price. The S&P 500 might be making new highs, but shares of Bed Bath & Beyond Inc. (NASDAQ:BBBY) are still well below their 2012 peak ($61.81 at the time of writing this article). This is an opportunity for the investors to get into the stock to rake in some hefty profits. Let’s assess why.

Improving Housing Market

The housing market recovery picked up steam in the final three months of last year, with prices rising at an annual rate of 7.3%, according to S&P Case-Shiller. Even during the tough five years for the housing market the company managed to grow earnings by 10.5% annually, thus it stands to reason as household formation returns to historic numbers Bed Bath & Beyond Inc. (NASDAQ:BBBY) should see revenue growth rise as well.

Compelling financials

Analysts expect the company to earn about $5 per share in the fiscal year ending February 2013. So at the current stock price Bed Bath & Beyond Inc. (NASDAQ:BBBY) is trading at about 12.2x forward earnings, which is one of its lowest P/E ratios in the past decade. Analysts expect the company to grow earnings by 14.5% in the future. Thus, this combination of low P/E and double digit expected growth makes this stock a compelling buy.

The company has a robust balance sheet with no net debt and some $750 million in net cash. The company had announced a new $2.5 billion share repurchase program which would amount to buying back about 20% of outstanding shares and would increase the expected $5 EPS in FY 2013 to $6 of EPS.

Versus Competitors

Bed Bath & Beyond Inc. (NASDAQ:BBBY) faces direct competition from Williams-Sonoma, Inc. (NYSE:WSM) and Pier 1 Imports, Inc. (NYSE:PIR). In my view Bed Bath & Beyond has an upper hand against its competitors. Bed Bath & Beyond’s forward P/E of 12.2 looks attractive when compared to Williams-Sonoma, Inc. (NYSE:WSM)’s P/E 16.25, Pier 1 Imports, Inc. (NYSE:PIR)’s P/E of 16.67 and industry average of 14.68.