Ross Stores, Inc. (ROST)

Ross Stores have a fantastic business model and will weather the storm ahead. However, expectations that they will weather the storm have taken over rational economics and allowed their stock price to increase as if we were currently in a bull market. Fundamentals completely debase what I agree is a compelling three month technical chart. But it is not so compelling if you back up the truck. A five year chart reveals a mountain range and we are currently at the summit of the largest of these individual mountains.

Let's pull up some stats. Cash and short term investments on the balance sheet is down 25% from the same period in 2007 and projected to remain down 25% in YOY comparison. Cash flow likewise is estimated to be below both 2006 and 2007 numbers. EPS over the past five years is 8.7% with Revenue at 11.09%. These numbers aren't bad, but they should not be commanding a stock price that is currently up 50% in the same period (in which the S&P is down 25%) with dark thunder clouds clearly ahead for retail. Maybe this is why Insiders have sold 275K shares in the past six months.

From a valuation perspective they offer a dividend slightly above the industry average which could be enticing since they have a decent cash position to support it. What scares me, however, is that it has increased by 25.49% over the past 12 months. That in my humble opinion is not sustainable in the current economic environment. Then again, they are playing catch-up in this area as the dividend growth rate over the past three years is actually 10% below the industry average. (so theoretically if they can hold the divvy steady that will probably allow them to move ahead of the industry average as weaker competitors are forced to cut dividends substantially or altogether).

Their debt to capital ratio is one of the lowest in the industry--this is spectacular. HOWEVER, their quick ratio is 0.42. This is scary. That means they do not have enough liquid assets to cover liabilities in the event that earnings are not able to sustain themselves. Just to give you an idea of just how bad that is, the industry average is 1.08x liabilities.

What is most worrisome to me right now is that ROST's profit margins are all (gross, operating, and net) about 25% below the industry average. That means they are making less on each dollar of sales compared to the industry. (keep in mind that the industry average includes companies like Walmart--which obviously skews the numbers, but not so much that ROST should have a price that is relatively STRONGER than WMT in the current environment).

Bottomline: Ross usually does quite well this time of year because college students have to go buy suits and ties and skirts etc... This explains the extremely predictable hills and values in the 5 year stock chart. But with a PE of 18.43 (high given the current eco. environment) and a price to book of 5x I think Ross is very expensive right now.