In fact, the home-furnishings sector, as a whole, has lost 27.3% of its value in the last 11 months. It is also down 31.7% from its highest close, which occurred almost three years ago.

For some individual companies, it’s even worse…

On May 2, New Jersey-based Linens ‘n Things filed for bankruptcy, defaulting on $1.35 billion worth of debt. This may finally be a sign that the market is nearing its bottom.

Bankruptcies will lead to decreased supply (Linens ‘n Things has already announced it will close 120 stores) and less competition… two factors that should help the profit margins on the remaining retailers.

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As you can see, after getting killed in 2007, home-furnishing companies are finally stabilizing. The sector has risen 13% since March. And it’s cheap. The sector is trading at a 34.1% discount to its historical, median P/E.

But, while the sector is no doubt very cheap, a 13% rally is not enough to get me excited…

The sector may just be in a temporary upswing in an otherwise bear market. I wouldn’t feel comfortable getting into this sector until it tests its previous low. If it makes another downward move that fails to take it to new lows, then the worst is likely behind us.

At that point you could buy any of the companies I mentioned above – Target, Bed Bath & Beyond, or Tuesday Morning. Costco and Wal-Mart would also benefit from an upswing in the sector, as would upscale retailer Williams-Sonoma

Good investing,

Ian Davis

Source: These Beaten-Up Retailers Are Showing Signs of an Uptrend