Shopping for a Bargain in Premium Apparel

Have you seen the new movie "The Social Network" yet? It's a look at how Harvard dropout Mark Zuckerberg built Facebook into the phenomenon that it has become in just a few short years. Facebook remains privately held, so only Zuckerberg and his closest associates reap the profits as the company adds users.

But the movie serves as a jumping-off point for profitable investing strategies arising from the youth culture. As a Forbes blog recently noted, there are several hot stocks that are tied to the trendy social networking boom.

Gen-Xers are especially interested in looking good (let's face it, who isn't!), and staying current with the latest fashion trends. And those trend-setting millennials often share a kindred spirit with those of us looking at small-caps. They look below the surface of the big chains for the hippest fashions, the stuff that shoppers don't find in Abercrombie & Fitch, Old Navy or Gap stores.

The release of September retail sales brought better-than-expected numbers for a few retailers and apparel makers that I'm watching. With the holidays rapidly approaching, this back-to-school sales report could help show us if consumers are feeling a little more confident about the economy and are willing to spend again.

Let's start with Buckle Inc. (NYSE: BKE), which has 421 stores in 41 states. Same-store sales rose a surprising 3 percent, much better than the 4.7 percent drop that analysts were expecting. Buckle's stock was up double-digits after the report, but investors sometimes have very short attention spans.

Back in September, Buckle's stock sank 8% because of a dividend disappointment. Just a few weeks ago, the company kept its quarterly dividend at 20 cents, and did not commit to paying out a special dividend that was announced around the same time in 2009. Still, the company is sitting on about $93 million in cash, so it could announce another special payout soon. Shares hit a 52-week low of $23 in late August, and the stock is struggling to rebound.

Another teen-focused retailer, Hot Topic HOTT said its monthly same-store sales fell 2.5 percent. That was better than the 3.5 percent drop that analysts expected. The company is paying a $0.07 dividend on November 1 to shareholders of record on October 18.

The Wet Seal (Nasdaq: WTSLA), which has 500 stores in 47 states, just said it's expecting higher-than-expected third-quarter earnings, at the high end of its guidance of a range of a penny to 3 pennies a share. Analyst expectations were smack-dab in the middle, at 2 cents.

The September retail report also brings Zumiez ZUMZ to our attention. Monthly same-store sales were up a robust 17 percent and the company, which focuses on active-lifestyle apparel, increased its earnings per share guidance from $0.25 - $0.27, to $0.28 - $0.30.

With Pacific Sunwear PSUN, which operates 900 stores across the U.S., analysts have mostly taken a wait-and-see attitude. Most rate the Southern California-based teen retailer a hold.

This brings us back to the Forbes blog I mentioned - and to a small-cap apparel maker that I really like. The company is Joe's Jeans JOEZ. If you're under 30, think like a millennial, or have kids, there's a good chance that you know about Joe's. The company's body-hugging jeans and other premium apparel are sold at some 1,200 U.S. stores.

A year ago, shares of Joe's were selling for less than 70 cents, and today they're sticking around $2. The stock could still prove to be a bargain if the company keeps turning out the stuff that teens and college kids crave.

What sets Joe's apart from other companies catering to the youth market is its marketing strategy. Joe's uses social media in ways that few of its competitors are, and with the onset of the Facebook generation, networking and apparel go hand-in-hand.

Only a few analysts are covering Joe's, and one has it as a buy, the other as a strong buy.

Why do I think Joe's Jeans is undervalued? Take a look at some of the key metrics. Sales have grown year-over-year by 37%. It carries a forward earnings multiple of 20. It has turned a profit for the past three years. And it has already generated a one-year return of 193% for savvy investors.

One other interesting tidbit: Joe's is opening its own branded stores, so fans can shop for The Jeans, The T, The Pant, The Shoe, The Bag, The Belt and The Shirt in one place. Two Joe's stores opened in Philadelphia and Southern California in the last two months. While there are no promises that it'll catch fire like Apple's retail storefronts did, it's an interesting move for Joe's - especially at a time when shopping venues are begging for tenants to fill vacant space.

This interesting little company is one to keep an eye on, and shares have the potential to leap higher as more Gen-Xers jump into the company's jeans.

A full analysis of Joe's Jeans is included in a Special Report that I've prepared on three recent additions to the Russell Small Cap Index - a small cap compendium of hidden gems just waiting to be unearthed by savvy investors. The Special Report is available by clicking here and signing up for a risk-free trial subscription to Small Cap Investor PRO.

Joe's Jeans reports earnings next week - I'll be covering the announcement for subscribers to Small Cap Investor PRO. Let me know what you think of Joe's Jeans, and my Russell Special Report, by sending an email to editorial@smallcapinvestor.com