Gap Leads Retail Apparel Group with 97 RS Rating

Steven Bobson, Europe & Americas Editor
September 17, 2012 /

Apparel retailing is a highly rated industry group with a slew of strong players.

Nine stocks within the group have a Composite Rating of 95 or better. As of Friday’s IBD,Gap ( GPS ) had the best Relative Price Strength Rating, at 97. The stock’s chart action also is inviting.

San Francisco-based Gap owns or franchises stores under the Old Navy, Banana Republic and Gap names. Company-operated stores are in the U.S., Canada, the U.K., France, Italy, Ireland, Japan and China. There are franchise agreements in other countries.

Gap has been trading tightly in recent weeks. A new buy point could emerge if Gap can complete a flat base it is working on.

The stock broke out from a cup-without-handle pattern July 19, but disciplined investors would’ve ignored it. Volume was only 2% above average on the breakout. A breakout needs a volume increase of at least 40% above average to suggest big money is at work.

A proper entry was established when the stock gapped up almost 13% in more than triple volume on Aug. 2. A gap-up gain is one of the few instances when an investor can buy a stock more than 5% beyond the ideal buy point.

A new base and breakout could offer an opportunity to add shares, or open an initial position. However, a new base would be stage three, which is less likely to work than a first- or second-stage base.

Some quality funds have been buying shares. Fidelity Contrafund and Vinik Asset Management added shares in the second quarter. Dreyfus Opportunistic Midcap Value Fund opened a new position. Overall, funds increased their stake in Gap by 11% in the first six months of 2012.

The Street expects Gap’s earnings to grow 35% this year, the best performance since 2004. Revenue is expected to grow 6.5%, also the highest since ’04.

In the past two quarters, EPS rose 15% and 40% as sales advanced 6% in each quarter.

The three- and five-year earnings stability factor is 9 and 10. The scale runs from 0 (calm) to 99 (erratic).

The company pays a quarterly dividend of 12.5 cents a share. The annualized yield is 1.4%.

 

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