Retail stocks have underperformed this year as sales figures have come in below expectations. However, Ken Burgess of Systematic Financial Management believes that some of the sector’s most recognizable names now look attractive after recent declines, and he explains why in the November 30 issue of Value Investor Insight.

Ken Burgess’ retail picks are a play on Mr. Market’s irrational behavior as he describes:

“A typical idea for us is the company that has been a strong growth story for years but starts to slow down,disappointing the growth investors who it. It still might be a great business generating tons of cash flow, but the whiff of slower growth can just devastate the share price.”

The retail sector has been the poster child for this kind of market reaction during the past few months, presenting several opportunities. Three such opportunities are Michael Kors (KORS), Abercrombie & Fitch (ANF) and Coach (COH). 

See also: Why Apple Is the Best Retail Stock According to this 15 Point Checklist

Retail Stocks: Michael Kors is undervalued

According to Ken Burgess, Michael Kors is the classic case of a company that’s grown rapidly for a number of years, but then growth has slowed and the market has unfairly punished the stock. With Kors’ shares down by 60% from their highs last year, Burgess believes that stock has reached a point when low expectations are now baked into the price.

And Kors seems to be stronger than many of its peers. The company hasn’t (to any great extent) made the big mistakes sellers of apparel, footwear and accessories can make, such as overexpansion and diversification. They haven’t gone too far afield in distribution or become overly promotional, which can deteriorate brand value. The Kors brand is maturing, but its strength is intact.

Kors’ most attractive quality is the company’s free cash flow generation and cash balance. On a normalized basis, free cash flow is estimated to be in the region of $600 million per annum. Kors has $1.3 billion in cash.

Upside catalysts include a shift in Kors’ shareholder base from growth to value and proof that the company can effectively manage the maturing of its brand.

Specifically, Ken states:

The company generates significant free cash flow, which we on a normalized basis estimate at more than $600 million per year. It has no debt and $1.3 billion in cash. In our discounted cash flow model we assume minimal top-line growth over the next five years and that margins stay flat. By our numbers we could pay $44 for the stock and expect to meet our 15% IRR hurdle.

There’s no arguing that the U.S. retail environment is questionable in the short run. But if we’re right that more disposable income will translate into higher consumer spending in a gradually improving economy, brand leaders like Kors should see tangible benefit from that. That’s more of an external catalyst. More specific to the company, as the shareholder base shifts further from growth to value, if the company manages the maturing of the brand franchise as well as we expect, that should be recognized in the valuation to a greater degree than it is today

Retail stocks: Kors

Retail Stocks: Steve Madden

Steve Madden (SHOO) is another former retail darling that’s fallen on hard times, which has appeared on Ken Burgess’ radar. The company’s business model is relatively straightforward, and the company has produced a good performance and growth consistently over the years.

Steve Madden has $150 million in cash and no debt, but assuming low-single-digit annual revenue growth and relatively stable margins the business is on track to report a normalized free cash flow somewhere in the region of $150 million per annum on average — 25% above 2015’s level.

Specifically, he notes:

The company designs and markets footwear and a variety of accessories under its own brand as well as others it has acquired over the years, such as Dolce Vita, Betsey Johnson and Brian Atwood. Roughly 25% of sales are made in company-owned retail stores, with the rest coming from wholesale distribution to department stores, specialty stores and mass merchants. The business model is relatively straightforward and has generated consistently good performance and growth. They don’t try to create trends, but they are the best in the business at identifying trends in the marketplace and basically recreating products that are working at a lower price point and getting them quickly onto store shelves. As fashion followers go, their products tend to be of higher quality and sell at higher prices. The strategy is particularly compelling in the footwear market, where consumers consistently over time turn over what’s in their closets. So the buyer gravitates to trendier looks, and Madden has carved out a niche in delivering those looks for less than the $500 or more the leading designers might charge.

It’s primarily the weak retail environment. Now is the time of year Madden is looking to exploit the latest trends in boots, but that’s going to be difficult when people overall aren’t buying boots. The balance sheet is strong, with more than $150 million in cash and no debt. When we look at valuation, we assume low-single-digit annual revenue growth and relatively stable margins, leading to something on the order of $150 million in normalized free cash flow. The company this year will probably earn around $120 million. When we run it through our model, paying around the current price for the stock we’d expect to earn an IRR of 15% on our investment. We consider that quite attractive for a business that delivers as consistently as this one does in what can be a pretty volatile industry.

Retail stocks: Shoo