Is It Time To Bet On The US Consumer?

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This month, consumer confidence hit its lowest point since March 2009, according to the Conference Board. And that has led many pundits to speculate that the holiday shopping season will be a weak one, with fearful consumers tightening their wallets and businesses struggling to meet profit and sales goals.

This tale of the tapped-out US consumer isn't a new one. Ever since the Great Recession and market crash of 2008, many have been saying that the American consumer is too awash in debt to do their part in spurring the economy forward.

But the numbers tell a different story. While the US consumer has certainly been hurting to a degree, retail and food service sales data shows that they've actually been remarkably resilient over the past couple years -- even while paying down their debt. Sales increased again by an impressive 1.1% in September, according to the newest Commerce Department data, and are now 19% higher than their recessionary low, and 4.5% higher than their pre-recessionary high.


Why the discrepancy between how people are saying they feel, and what they are doing with their money? I think it probably has a lot to do with the emotional scars of the deep 2007-2009 recession and accompanying stock market crash. Memories like those don't fade quickly, so it is not surprising that Americans have remained pessimistic even as the economy has stabilized and the stock market has moved higher over the past two-and-a-half years. The fact that unemployment has remained troublingly high even after the recession ended no doubt has also contributed to the gloomy outlook.

But this combination of low sentiment and better than expected performance of many companies that sell consumer goods may be making for some very intriguing value investment opportunities among consumer stocks. Value investors have to have the fortitude to invest in stocks when expectations and sentiment are low, be it for individual companies, sectors, or the market as a whole. Right now, my Guru Strategies -- each of which is based on the approach of a different investing great -- are finding a number of bargains amid the fear-filled consumer sector. Here are some of the consumer stocks that they are particularly high on.

Deckers Outdoor Corporation ( DECK ): This Georgia-based firm makes footwear and accessories, including the popular UGG and Teva brands. It has a market cap of $4.1 billion.

Deckers gets strong interest from my Peter Lynch-inspired model. The Lynch strategy considers it a "fast-grower" -- Lynch's favorite type of investment -- thanks to its impressive 40.5% long-term earnings per share growth rate. (I use an average of the three-, four-, and five-year EPS figures to determine a long-term rate.) Lynch famously used the P/E/Growth ratio to find bargain-priced stocks, and when we divide Deckers' 29.2 price/earnings ratio by that long-term growth rate, we get a P/E/G of 0.72. This model considers anything below 1.0 to be acceptable, so that's a good sign.

Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt/equity ratios less than 80%. Deckers' D/E is zero, another good sign.

Skechers USA ( SKX ): This trendy California-based retailer specializes in casual footwear, and also sells some other clothing and apparel. It sells its products through its own retail stores, and through department stores, specialty stores, and the Internet. It also has a network of global distributors that sell its products in over 120 countries and territories.

My Benjamin Graham-inspired model is high on Skechers. Graham, known as the "Father of Value Investing", was a very conservative investor, and this approach looks for companies with good liquidity (current ratio of at least 2.0) and strong balance sheets (long-term debt should not exceed net current assets). Skechers has a 3.7 current ratio, and about $600 million in net current assets vs. $79 million in long-term debt. It also trades for just 7.8 times three-year average earnings, and just 0.74 times book value.

Hansen Natural Corporation ( HANS ): I wrote about this California-based firm, which makes a variety of natural sodas and other drinks, back in May because my Warren Buffett-inspired model was high on it. Since then, its shares have jumped over 30% while the broader market has been in the red -- and my Buffett model is still high on it. A few reasons: The firm's earnings per share have dipped in just one year of the past decade; it has no long-term debt; and it has averaged a 27% return on equity over the past decade, a sign of the "durable competitive advantage" Buffett is known to cherish.

LKQ Corporation ( LKQX ): This Chicago-based auto part firm offers a variety of original, aftermarket, and used parts and systems. It has over 430 locations in the U.S., Canada, and the U.K.

LKQ ($4.4 billion market cap) gets strong interest from my James O'Shaughnessy-based growth stock model. It looks for firms that have upped earnings per share in each year of the past five-year period, which LKQ has done. The model also looks for a key combination of variables: a high relative strength, which is a sign the market is embracing the stock, and a low price/sales ratio, which is a sign it hasn't gotten too pricey. LKQ has a strong 12-month relative strength of 88, and its P/S ratio of 1.46 comes in just below this model's 1.5 upper limit.

LKQ also gets strong interest from my Lynch-based strategy. A couple reasons: Its 29.5% long-term growth rate and 22.6 P/E make for a solid P/E/G ratio of 0.77, and its debt/equity ratio is a reasonable 40%.

iRobot Corporation ( IRBT ): Founded by M.I.T. roboticists back in 1990, this Massachusetts-based firm makes the Roomba robotic vacuum, as well as other robots that can perform household chores like floor washing, pool cleaning, and gutter cleaning. It also makes robots used by the military for such tasks as surveillance and bomb-disposal.

iRobot ($939 million market cap) gets strong interest from one of my best-performing models, the strategy I base on the writings of Motley Fool co-creators Tom and David Gardner. This model likes iRobot's strong recent earnings and sales growth (85% and 28%, respectively, in the most recent quarter vs. the year-ago quarter); its lack of any long-term debt; and its combination of hot (relative strength of 95) but reasonably priced (0.51 P/E/G) shares.

I'm long IRBT, DECK, SKX, LKQX, and HANS.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: DECK , HANS , IRBT , LKQX , SKX

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