My colleague David Sterman recently wrote a piece about the challenges investors face when they spot a company they would love to own, but the stock is just too darn expensive. [Read Dave’s article here]

The basic takeaway is to keep a close eye on the stock in hopes that an opportunity arises to pick it up at a more appealing valuation.

About a decade ago, a specialty apparel retailer had a stock that qualified as a small cap and flew under the radar screen of most investors. But between about 2003 and 2006, the market began to take note of its stellar growth prospects, and sent the shares up more than ten-fold.

Like Dave describes in his article, I thought I missed the boat, as the stock has risen only slightly and the valuation has remained rich, which means there have been only a few brief opportunities to pick up the shares on the cheap. One of those opportunity exists now, because the stock is bumping along its lows of the past year, which I atribte simply to the fact that retail, as an industry, remains out of favor with investors.

The stock in question is Urban Outfitters (Nasdaq: URBN), best known for its trendy namesake store base, consisting of about 160 stores, the vast majority of which operate in the U.S., but are also found in Canada and Europe. Urban Outfitters stores cater to young adults between 18 and 30 years of age, selling clothing and an eclectic mix of homegoods and media that qualify as “edgy” and “urban.” Its origins in university towns speak to its original target market.

#-ad_banner-#The company also operates 145 Anthropologie stores, again with the same location mix, but focuses instead on women between 30 and 45 years of age. The merchandise mix is eclectic, but less edgy and perhaps more suburban, especially compared to the namesake stores. Other sales channels include a small number of Free People and Terrain stores, as well as the wholesaling of the Free People brand to department stores and other specialty retailers.

Urban has proven itself a standout in the retailing industry, as it has been largely able to avoid volatility in same-store sales trends. It’s little secret that consumers are fickle, and it’s extremely difficult to predict which fashion will become popular with shoppers. Urban has, for the most part, been able to stay ahead of the curve with both of its primary concepts, which is probably due to the fact its stores do look and feel different from most competing store chains.

The proof of this success is in the numbers. Total sales grew steadily throughout the credit crisis and subsequent plummet in consumer spending. The top line has grown more than +21% each year for more than a decade, and management continues to target annual sales growth of more than +20% over the longer term.

Urban is also very profitable overall, and has a goal of reporting in excess of 20% operating margins. Sales growth and a focus on profits have allowed earnings growth to exceed +25% annually in the past 10 years. Profits fell -11% during 2007 as the credit crisis was reaching a fever pitch, but quickly recovered.

More recently, during Urban’s fiscal second quarter, same store sales rose +9% at the namesake stores, and a more impressive +13% at Anthropologie. The company’s net sales improved +20%, which is on pace with management’s long-term goals, while earnings skyrocketed nearly +45% to $0.42 per diluted share. Given this stellar performance and appealing outlook, it’s difficult to see why the share prices have been weak.

It’s also worth pointing out the firm’s impressive ability to generate cash flow. Last year, free cash flow reached about $1.26 per diluted share, or just slightly lower than diluted earnings per share. Better yet, even with the rapid growth, Urban generates more capital than it needs to expand. As a result, management is repurchasing shares, which further boost per share results. During its most recent quarter, Urban Outfitters bought back $68 million in stock at an average price of $33.72 per share.

Action to Take —> Consensus earnings expectations call for $1.68 in per share earnings for Urban’s full fiscal year. At the current share price, the forward P/E is 18.5. This isn’t a bargain-basement multiple in absolute terms, but it is the lowest multiple Urban has seen in some time, given the shares have drifted to their lowest levels in the past year.

And given the rapid sales and earnings growth being targeted by management, this isn’t an excessive multiple at all. I don’t usually advocate paying up for growth, especially considering many other retail rivals trade for much lower earnings multiples. But in this case, Urban Outfitters could be worth it, as there are very few retailers able to grow more than +20% annually.