Do Holiday Sales Mean Retailers' Shares Are on Sale Too?

This holiday season has shown itself to be the most vicious yet between retailers. Most have opened up for days on end leading up to the biggest holidays of the year in order to capture as much holiday traffic as possible. Many of these retailers have also offered huge discounts to regular retail prices, which naturally has led many Foolish investors to wonder if these actions are a sign of desperation, or if they will be hugely profitable to retailers that can draw customers in.

Getting around the competition
For instance, Macy's has been performing well in recent quarters by increasing its total sales, net income, earnings per share, and comparable-store sales, while J.C. Penney is at the other end of the spectrum. J.C. Penney suffered an eye-popping $489 million net loss in the third quarter of fiscal 2013, which was even worse than the third quarter of 2012 when the company lost $123 million.

Recent results are as diverse in the retail sector as retailers are with Wal-Mart , Costco Wholesale , and Dillard's posting varying results depending on what sales promotions and products they have to offer the consumer. In their fiscal fourth quarters, these retailers have been doing everything possible to increase sales. Clearly, we need to look more closely at these retailers to figure out which companies are worth investing in.

The importance of P/E ratios
At the end of the day, buying stock in a business automatically makes that person a partial owner of that business. Like any other business owner, a shareholder is principally concerned in the company's earnings. One of the best ways to quickly gauge whether a company will offer a decent return on a shareholder's investment is to look at the company's current share price in relation to those earnings.

The price-to-earnings ratio (P/E) gives Foolish investors an idea of how much they are paying out for every dollar earned by the company. Most of the time, a low P/E is generally better because you are paying less for every dollar of earnings; however, sometimes a low P/E can be misleading if the company is either shrinking or its growth is declining. Let's take a closer look at the P/E ratios of some of these big-box retailers.

Placing your bets
The chart below compares five of the largest big-box retailers based on their estimated earnings for the current and following year, as well as their P/E ratios and estimated earnings growth over the forthcoming fiscal year.

J.C. Penney's P/E ratio obviously cannot help Foolish investors evaluate if the company makes a good investment because its price to earnings is still in the negative. Further research is therefore required by Foolish investors to assess if the company can turn itself around and end its recent losses. The other retailers, on the other hand, represent an entirely different story. All are highly profitable and are expected to grow at a respectable pace during the next fiscal year. Costco appears to be the most expensive of the group, not only in terms of the company's current P/E ratio, which stands at 23.7, but its expected earnings growth next year of 11.5%. Foolish investors considering an investment in the retail sector should weigh these facts carefully since Macy's is expected to grow just as much as Costco next year and trades for only 13.3 times earnings. Even Dillard's, which is expected to grow at a slower but still respectable 8.3% next year, trades for a far more reasonable 12.6 times this year's earnings. Based on the above information, Foolish investors would do well to give Dillard's and Macy's a closer look.

Foolish takeaway
While a simple P/E is not the single deciding factor in determining if a stock is a good investment, it is a great place to start. As we have learned, Macy's and Dillard's should be looked at more closely as both have solid estimated earnings growth for the next year along with modest P/E's. The next thing to look at would be their expected earnings growth in the upcoming months as well as each company's unique strengths and weaknesses. This way, investors can gain an idea of whether or not the company is truly undervalued or overvalued.

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The article Do Holiday Sales Mean Retailers' Shares Are on Sale Too? originally appeared on Fool.com.

Fool contributor Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale and Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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