Can Clothes Help Make Your Portfolio Recession-Proof?

Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the economy in a steady upswing, many people are worried that the stock market is in a bubble that's about the burst. While I am not one of those individuals, it doesn't hurt to be a little cautious and buy stocks that will pad your portfolio in case of a fall.

Clothing-related firms come to mind as companies that will do well even during a recession. Everyone needs to wear clothes, after all, even when the economy is hurting.

Before plunging your money into just any clothing company, however, you should first take a look at what each has to offer. American Eagle (NYSE: AEO), The Buckle (NYSE: BKE) and Ross Stores (NASDAQ: ROST) are all major retailers that have shown that they have the ability to succeed. But is that success likely to continue?

American Eagle looks at international expansion

With international expansion as one of this company's main goals, American Eagle appears ready to take operations to the next level. The firm is about to take control of six licensee stores in China, and that's just the beginning of its Chinese expansion. China represents one of the largest apparel markets on the planet, and this is primarily driven by an growing middle class and the country's booming urbanization. The company's Chinese expansion is in addition to its recent entry into Mexico to take advantage of its large young demographic that is increasingly consumed by fashion trends. Like China, Mexico also has an increasing middle class.

A consensus estimate from 26 analysts expects American Eagle to grow at a rate of 11.6%. The firm currently trades with a price-to-earnings ratio at 14, which is well within value range, and the consensus estimate indicates the firm could be priced at over $38 in 2018. That's approximately a 15% annual growth on share price.

The Buckle focused domestically

Unlike American Eagle, The Buckle hasn't focused much of its attention to developing its brand outside of the United States. All of the company's 440 stores are located in the U.S. Due to the fact that the firm doesn't look to be expanding internationally or even into Canada, I see limited growth potential. I could be wrong, however, as there is still much room for the company's growth within its own borders.

In Nebraska, the state with the highest density of The Buckle stores, there is only one store for every 145,000 people. That shows opportunity for local expansion. Furthermore,analysts believe the firm will increase its earnings per share by 10% this fiscal year.

Despite those arguments for the bulls, however, I think that the company's limited international expansion is too hard to ignore. I would avoid buying The Buckle's stock.

Ross Stores offer brand names at a bargain

Because Ross Stores offers name brands at a bargain, the store looks attractive for recession-proofing your portfolio. The firm hit a home run in the last quarter's earnings release when its GAAP-reported sales finished 7.8% higher than in the previous year's first quarter. Looking ahead, the average estimate is $2.51 billion in sales, with an average earnings per share of $0.93.

The picture improves further when taking a look at next year, where analysts estimate revenue at $10.33 billion and earnings per share at $3.89. Here at The Motley Fool, 392 members of 425 who voted believe the stock will outperform. Wall Street agrees. In the S&P Capital IQ, most believe the firm will outperform with an average price target is $66.95.

Which to choose

American Eagle looks to be the firm with the greatest upside potential. I am privy to investing in companies that are heavily involved in the global village. Greater exposure to less stable economies makes the company less attractive to the bearish investor, however. When recession-proofing your portfolio, I would choose a firm that is located in a more stable economy (if we can call the American economy stable). As a bargain outlet that still provides investors with name-brand clothes, Ross Stores appears to be in the best position to profit in a recession -- and so for the purposes of protecting your portfolio, I would invest in this company.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

 


Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends The Buckle. The Motley Fool owns shares of The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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