TRADE INSTRUCTIONS
Date: February 1, 2017
Name: The Cato Corporation
Symbol: CATO
Type: Open
Limit: Buy below $26

TRADE TARGETS
Holding Period: 3 months
Target Return: 11.5%
Annualized Return: 46%
Target Price: $29
Stop Loss Level: $23

COMPANY DESCRIPTION
The Cato Corporation is a fashion specialty retailer that sells primarily to junior/misses and young women. The Company’s merchandise lines include dressy, career, and casual sportswear; dresses, coats, shoes, lingerie, costume jewelry, handbags; and lines for kids and newborns. Its stores are located primarily in strip shopping centers principally in the southeastern United States and offer an assortment of on-trend apparel and accessory items. Link to company website.

TRADE RATIONALE
This alert was triggered by the most technical component of our Rapid Profits Matrix, which looks for “fallen angels” that are bottoming out. A quick look at a chart for CATO confirms that it has tanked over the past three months, giving up nearly a third of its value since peaking near $36 in mid-November.

That’s because on December 1 Cato reported November same-store sales dropped 10%, and on January 5 it announced that number increased to a 12% decline for December. At the same time, the company reduced guidance for full year earnings by 20%. So how does a stock that has performed so poorly jump to the top of our buy list?

Cato is currently priced at only 1.7 times book value, which combined with its forward P/E ratio of 12 time future earnings strongly suggests it has become oversold. Also, Cato carries no long term debt and holds over $9 in cash per share, so it has plenty of liquidity with no threat to its solvency. For those reasons we’re expecting a “dead cat bounce” off its lower Bollinger Band (at $24.17 at yesterday’s close) back up towards its 50DMA value near $29.

NOTE: CATO is optionable, but trades on very low volume so use limits when placing orders.