The stock market always looks ahead. That old axiom has never been more true as investors seek out companies that are slumping now but poised for better days ahead.

Just look at the stock charts of Office Depot (NYSE: ODP), H&R Block (NYSE: HRB) and Sandridge Energy (NYSE: SD). Their shares have been making an upward move even through quarterly results remain fairly dismal. Farsighted investors understand that these companies should be assessed on where they’re headed, not where they’ve been.

#-ad_banner-#That logic keeps me focused on the retail sector, where current results are disappointing, but the road ahead — with just a moderate reduction in unemployment rates — could push sector sales up moderately and profits higher at a robust clip.

Here are some retail names I’m focused on right now…

1. HHGregg (NYSE: HGG)
Electronics retailer Best Buy (NYSE: BBY) enjoyed a nice stretch of less competition when rival Circuit City went out of business in 2009. Not anymore. Regional chain hhgregg has begun to expand away from its focus on the Southeastern United States, beating a path toward the eastern seaboard. After years of steady growth, sales have now pushed past the $1.5 billion mark, and hhgregg is starting to mark real gains in terms of inventory management, supply chain logistics and purchasing power.

Yet you’ll find that results for the all-important 2010 holiday selling season were pretty sobering. A still-cautious consumer and an electronics segment that has had a dearth of hot new products led to tepid fiscal third-quarter (ended December) results. Although sales rose 30%, they still came in below management’s plan, as same-store sales fell 6%. That spurred a wave of analyst downgrades and shares are now down from $30 last spring to a recent $17.

I’m a big fan of growth stories that hit temporary hiccups and are suddenly loathed by myopic Wall Street analysts. These are precisely the times to get involved with stocks like this, especially in the case of hhgregg, where the slowdown is unlikely to last past this year.

My optimism stems from an expected eventual rebound in consumer spending, along with a steady expansion in hhgregg’s store base. The company has boosted its retail outlets by about 40, to a current 174 stores,  a figure that may exceed 200 a year from now.

Right now, the tough economy is masking the benefits of that expansion. For example, gross margins have slumped roughly 100 basis points from a year ago, equating to roughly $6 million in lost income, or about $0.16 a share. The company is expected to boost profits about 20% in the fiscal year that begins in April. With an economy on stronger footing, the profit growth would have likely been closer to 30%. I expect margins to rebound in calendar 2012, which could help this retailer boost profits by at least 20% again, even if the store expansion cools.

Meanwhile, shares trade for about 13 times projected (March) 2012 profits, roughly half the multiple that hhgregg garnered in the past few years. If this retailer were running out of growth opportunities, such a low multiple would make sense. The fact that shares also trade for about six times projected EBITDA, on an enterprise value basis, makes little sense. To my mind, it merely serves as a great entry point before same-store sales and profit margins rebound. Shares could trade back up to 20 times forward earnings, representing 50% upside.

2. Casual Male(Nasdaq: CMRG)
If you followed my advice last July and bought shares of this menswear retailer when it traded around $3.30, you would have scored a 50% gain by October as shares moved past $5. Well, you’ve just gotten a second chance as shares have since pulled back to around $4.20.

Little changed in the ensuing seven months, except for the fact that hopes for a consumer-led rebound have been pushed from 2011 into 2012.

Casual Male caters to large men, many of whom struggle to find suits and other clothes in their sizes at traditional department stores. The reason to own this name: management has done an impressive job of controlling costs, which explains why profits in the fiscal year that ended in January likely doubled, even as sales were flat. That helps set the stage for further profit gains in coming years, even if sales grow only modestly. Analysts think sales in fiscal (January) 2012 can rise by 2% to 3%, but per-share profits could rise nearly 20% to about $0.39.

I’m not putting too much stock in that forecast just yet. Shares have fallen more than 20% recently, which may indicate that fourth-quarter results were challenging. If that’s the case, then shares may pull back, presenting an even greater bargain for long-term investors. If you’ve got a long-term view, my back-of-the-envelope math from last summer still applies: If you assume that sales rebound to 2007 and 2008 levels of about $465 million (from a likely $400 million in the year that just ended), then the company’s newly-lowered cost structure could yield $30 million in operating income, or $0.70 a share. That means shares now trade for about six times that “normalized profit.” A multiple of 10 times profits seems more appropriate. For patient investors with a one- or two-year time horizon, you may be looking at 50% upside.

Action to Take –> As I’ve noted in the past, the retail sector could show solid profit gains even on only moderate sales growth. That scenario looks less likely to play out in 2011 than I had expected, but it is a real possibility for 2012 and beyond. Investors always look ahead, so sector shares may well move back into favor this year. As I mentioned, the two names above look to have about 50% upside. Other retailers I like include RadioShack (NYSE: RSH) [see my write-up here], Aeropostale (NYSE: ARO) [here], and Supervalu (NYSE: SVU) [Ryan Furhmann’s analysis here].

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