Leveraged buyout (LBO) activity within the specialty retail space has heated up over the past year and a half, with the completion of the Rue 21 takeout in October the most recent deal. The LBO analysts at Jefferies believe the group remains on the radar for future leveraged buyouts given the companies’ significant cash balances, little to no debt and business models with consistent cash generation. The current screen across 23 retail companies in their coverage universe shows that specialty retailers remain attractive takeout candidates from an internal rate of return (IRR) perspective.

The Jefferies screened for the stocks that are candidates that have the highest IRR currently. With the average retailing/specialty store IRR at about 14%, Jefferies is focused on the five top stocks over 20%. Here are their top five LBO takeout candidates for 2014.

Aeropostale Inc. (NYSE: ARO) leads the group with a current IRR of a whopping 29%. The company recently adopted a poison pill plan to thwart unwanted takeover attempts. The retailer denied that it was resorting to the poison pill measures to ward off any specific takeover proposal. Its plan, that was effective November 26, aims to provide stockholders with adequate time to fully assess any takeover bid. The retailer indicated it would put the plan to a stockholder vote at its 2014 annual meeting. The plan will expire at the 2014 annual meeting if it does not get stockholder approval. The Thomson/First Call price target for the stock is $10. Aeropostale closed Monday right there at $9.75.

Abercrombie & Fitch Co. (NYSE: ANF) also has a strong 26% IRR figure that private equity would find tempting. The company posted disappointing sales results in third-quarter 2013, marking lower-than-expected top-line results for the fourth consecutive quarter. The company’s sales for the quarter declined 11.3% year over year to $1,033.3 million. Weak third-quarter sales resulted mainly from poor performance in the domestic market, as well as continued weakness in the overall spending among youngsters. While the numbers seem dismal, these are exactly the kind of underperforming companies that private equity looks at the most. The consensus price target for the stock is $37. Abercrombie & Fitch closed Monday at $34.02.

Body Central Corp. (NASDAQ: BODY) has a tiny market cap and a huge 22% IRR. Body Central operates as a specialty retailer of young women’s apparel and accessories in the South, Mid-Atlantic and Midwest regions of the United States. It operates stores under the Body Central and Body Shop banners, as well as a direct business comprising its Body Central catalog and e-commerce website at BodyCentral.com. The company’s stores sell tops, dresses, bottoms, jewelry, accessories and shoes primarily, under its Body Central and Lipstick labels. The lower the share price goes, the more attractive the stock becomes. The consensus price target is $5, with the high target at $7. The stock closed Thursday at $3.94.

Francesca’s Holding Corp. (NASDAQ: FRAN) is another small cap name with a strong 22% IRR. The company operates a chain of retail boutiques that offer a selection of fashion apparel, jewelry, accessories and gifts primarily to its female customers. This once hot retailer has become less and less of a Wall Street favorite. That is exactly what private equity looks for to exploit the stock weakness to buy at a lower level. The consensus price target for the stock is $24. Francesca’s closed Monday at $18.85.

American Eagle Outfitters Inc. (NYSE: AEO) rounds out the top five LBO candidates at Jefferies with a strong 20% IRR. John Buckingham of Alfrank Asset Management and the Prudent Speculator newsletter believes that American Eagle is a top name to buy for 2014. He cites strong cash flow, a great balance sheet, no debt and $2 a share in cash as all good reasons to own the stock. These are the exact reasons private equity would like it as well. Investors are paid a 3.1% dividend. The consensus price target for the stock is $17. American Eagle closed Monday at $16.28.

Since 2010, 11 retail LBOs have taken place, including such high-profile names as J. Crew, Hot Topic, Cole Haan and others. It is pretty clear that private equity firms see a ton of unlocked value in the right retail names. The Jefferies top five certainly make sense on the basis of what is attractive from a takeover standpoint. For investors that take a shot, even if a deal does not happen, the stocks are attractively priced and may offer upside either way.

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