8 Stocks With Modest P/E, P/S and P/CF Ratios

In five years I've been right once and wrong twice on Ann Taylor Stores (ANN) stock. It has outpaced the S&P 500 index by 19 percentage points since I recommended it in January at 10 times earnings. But it has lagged by 26 points and 13 points, respectively, since I recommended it last year and five years ago, both at 18 times earnings.

Shares now go for 14 times this year's earnings forecast. They turned up recently on a search for companies with price/earnings, price/sales and price/cash-flow ratios that are modest for their industries. The seeming discount notwithstanding, two things convince me to abandon my losing record on the stock and look elsewhere for bargains. The first is how mature the chain now seems under the harsh light of a wobbly economy. The second is the stock's surprisingly long failure to impress.

On Aug. 22 Ann Taylor said that sales at stores opened at least a year -- a retail measure that's closely watched on Wall Street -- fell 10.8% from a year earlier. Single-digit gains are common for healthy chains while double-digit ones are a hallmark of fast growers. Double-digit declines are a sign that a chain is losing its appeal or has opened too many stores. Speaking with analysts at the time of the report, Kay Krill, Ann Taylor's chief executive, placed only part of the blame on slowing consumer spending. Merchandise was not as "modern, stylish or relevant" as it should have been, she said. Serious suits in staid colors, of which Ann Taylor stocks an endless variety, haven't sold well.

The company's frank admission of merchandise mistakes is promising. So, too, are quick efforts to correct them. Ann Taylor's web site already emphasizes animal prints, ruffles, flared pant legs and pencil skirts. The company plans to reduce the number of items it stocks by 30%. It expects to reduce annual costs by $10 million to $15 million this year, in part by closing dozens of underperforming stores.

Less promising is that investors have seen this before. Both of my flubbed recommendations of the stock cited analysts who had observed significant fashion improvements. I recently reviewed a New York Times write-up of the company from November 1991, six months after its initial stock offering. It mentioned declining same-store sales, fashion missteps (a move from elegance to trendiness and lower quality) and an overambitious store expansion that had cannibalized business at longstanding stores. Since Ann Taylor's stock debut its store count, including lower-price Loft and Outlet stores, and its yearly sales, including online sales, have both quadrupled. Its stock price, adjusted for splits, has little more than doubled. Over 17 years that's a compounded return of only about 4% a year.

Management's self-flagellation over merchandising would be more comforting if I thought fashion was to blame for Ann Taylor's current valuation. Perhaps the problem is more basic than that. Maybe Ann Taylor has simply reached the limit of its growth potential. It has 19 stores for each American state. It collects $18 in yearly sales for each American woman. Cost cuts might boost margins. A pick-up in the economy might bring a surge in sales. Liberal spending on share repurchases might grow earnings per share faster than total earnings. But for now Ann Taylor's growth seems likely to prove as restrained as its suits. Earnings per share are expected to dip this year and increase 10% next year. Barring a much deeper stock discount or convincing signs that I'm wrong about the growth potential, I'll pass.

On page two of this story, you can have a look at seven other modestly priced companies my screen recently produced. Run the search yourself anytime using SmartMoney's stock screener.