Liz Claiborne: Best Upside Opportunity

Liz Claiborne (LIZ) has been a favorite of Stone Fox Capital for a while now. Not sure we'd agree with the best upside pick, but possibly in the retail space. LIZ has a huge opportunity to rebound and the current retail climate is becoming more favorable. The WMT news shows signs of consumers starting to move back up the retail ladder.

The 2011 EPS target of $.68 is very compelling with the stock in the $6s. Our target continues to be in the $12-15 range. A stronger retail environment will all of a sudden make that transformation much more successful.

• KeyBanc analyst says, "Despite a high operating risk profile, we think Liz Claiborne represents one of the best absolute upside opportunities in our coverage. The Company was beset by strategic missteps predating the current macroeconomic environment. Management has engaged in what we consider to be some of the most aggressive transformational activities we have ever seen in a company – divesting its eponymous Liz Claiborne brand, reshuffling much of the senior leadership team and resolving near-term liquidity issues. While management has not yet demonstrated an ability to drive a top-line turnaround, we believe the combination of expense cuts as well as structural changes to the profitability model should allow the Company to return to profitability in late 2010. We are raising our 2010 estimate from a loss of $0.06 to EPS of $0.03 given our greater comfort level with the gross profit benefits from the LIZ/JCP deal. At 0.5x EV/Sales (vs. a 0.9x Apparel group mean), we find the valuation attractive...(and introducing a 2011 EPS estimate of $0.68)."