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Shopping Like Warren Buffett

Apparel stocks are beaten down and Warren Buffett's been buying. Investors can sort through the clothes bin by using the Internet to search for statistically cheap companies. Such a screen turns up seven stocks that are worth further investigation.

By Warren Gump (TMF Gump)
July 10, 2000

We're all aware that Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) has stepped up to the plate for a couple of apparel manufacturers, Jones Apparel (NYSE: JNY) and Liz Claiborne (NYSE: LIZ). Given Mr. Buffett's interest, and ramblings from several other value investors that the industry includes many companies at attractive valuations, I thought it would be worthwhile to do some window shopping and see if anything catches my eye.

Where to Start?
I'll be the first to admit that I know very little about this industry. Just about the only thing I do know is that the fashion industry has a tendency to be pretty volatile. Since we are fortunate enough to have a Bloomberg machine here at Fool HQ, I looked up Jones Apparel and found the 15 largest companies in the industry by market capitalization.

To find some companies that might meet my value criteria, I searched through Bloomberg data for companies on the list with projected price-to-earnings ratios (P/Es) less than 10 and historical P/Es below 15. (I wanted to be sure that the companies selected had been profitable historically.) I sifted the remaining companies to find those with net debt-to-market capitalization of less than 20%. This criterion, which some might consider too stringent, was used to ensure that the companies evaluated at least had the appearance of balance sheet strength.

Internet Sources to Find Companies in an Industry
After weeding through my list of companies, I realized that lots of people don't have access to a Bloomberg. What are they supposed to do to find companies in an industry? My first thought was to go over the industry section of Hoovers. They have a comprehensive list of companies and capsules about them, but the list includes public and private companies and can be somewhat unwieldy if you're trying to narrow your search criteria into investable ideas.

When I asked a few people where they search for information on companies in industries, Bill Mann suggested Yahoo! Finance. I strolled over there and did find a good list of companies by industry. Each company's symbol is hyperlinked to detailed quote and company information, so you can fairly easily get the scoop on a company. The only problem with this list is that it is ranked by analyst recommendations. Some people may be very interested in such rankings, but that information is basically useless -- perhaps even misleading -- given the conflicts of interest most analysts face.

As it turns out, CNBC.com has the best free industry search tool I could find. I hate tooting a competitor's horn, but this tool lets you not only find companies in an industry, but also search on numerous income statement, balance sheet, cash flow statement, and technical criteria. I couldn't exactly replicate my search with this engine, since it doesn't have debt-to-market cap (it does have debt-to-equity), but the lists of companies were fairly similar. Some companies seem to be classified differently between Bloomberg and the CNBC search engine: CNBC didn't have Polo Ralph Lauren (NYSE: RL) listed as an apparel manufacturer, but Bloomberg did. Nonetheless, this tool seems to be quite helpful and I would encourage you to check it out.

Virtually Everything's Cheap, But Quite a Few Have Debt
One of the more interesting findings was that requiring P/E ratios lower than 10 (actually 10.5) didn't eliminate too many stocks. The only two kicked out of the list were Gucci Group (NYSE: GUC) at 27 and Columbia Sportswear (Nasdaq: COLM) at 16. Every other company had a projected P/E of 10 or lower! That's pretty inexpensive when you consider that the S&P 500 is trading at 25x current-year estimates. (Columbia Sportswear has doubled over the past 15 months, as investor concern about company performance abated, showing the benefits of considering good stocks when they're knocked down.)

The balance sheet criteria knocked out quite a few companies, including Jones Apparel, V.F. Corp. (NYSE: VFC), Polo Ralph Lauren, Russell Corp. (NYSE: RML), Tommy Hilfiger (NYSE: TOM), Kellwood (NYSE: KWD), and Phillips-Van Heusen (NYSE: PVH). Some of these companies could be worth a look, but I don't want to start out looking at companies in a fairly volatile business that have a lot of debt. I'd need a special reason to look into these firms.

The Finalists
Which companies are left to look at a little more closely? They are Liz Claiborne, Guess? (NYSE: GES), Nautica (Nasdaq: NAUT), Quiksilver (NYSE: ZQK), Oshkosh B'gosh (Nasdaq: GOSHA), and Donna Karan Intl. (NYSE: DK). Scooting below the top 15 market cappers, I added Cutter & Buck (Nasdaq: CBUK) to the list, since I have been watching its rise and fall and know that it meets the above-mentioned financial criteria.

Here is data on each company according to Bloomberg as of Thursday, June 29:

          P/E        P/E      Year-End

        Trailing  Current Yr  Net Debt/

Symbol  Earnings   Earnings   Mkt. Cap 

LIZ      11.5x       10.5x        4%

GES      11.0x        9.5x       14%

NAUT      8.5x        7.4x        0%

ZQK      11.3x       10.2x       17%

GOSHA     9.5x        8.2x       15%

DK       12.9x        9.4x        0%

CBUK      7.9x        6.1x       16%