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Five Under the Radar Consumer Picks from the Gurus

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Despite concerns about skyrocketing gas prices, the U.S. consumer is continuing to prove remarkably resilient, according to the latest retail sales figures. According to Thomson Reuters, same-store sales at 25 major stores jumped an average of nearly 9% in April vs. the same month a year ago. Even accounting for the fact that Easter fell in late April this year as opposed to early April last year (which meant more Easter-related shopping was done in March last year), sales have been fairly strong.

Still, the high gas prices and lingering weakness in the job market are leaving a cloud hanging over many consumer-oriented stocks. And that's created some good buying opportunities, several of which are popping up on the radars of my Guru Strategies (each of which is based on the approach of a different investing great).

As an additional bonus, consumer and food stocks tend to be two of the most resilient sectors during the summer months -- after many investors act on the old adage, "Sell in May and go away." That's what a study recently highlighted by MarketWatch's Mark Hulbert found. The study, performed by Ben Jacobsen and Nuttawat Visaltanachoti of New Zealand's Massey University, examined the "Sell in May" phenomenon. It found that from 1926-2005, all sectors and industries performed better during winter than summer, but that the effect was "almost absent in sectors related to consumer consumption".

Of course, that's no guarantee that consumer and food stocks will outperform every year in the summer months, and your focus should always be on buying solid, fundamentally sound stocks -- whatever the time of year. But, if history is any indication, the study indicates these type of stocks may well get a bit of an extra bonus in the coming months due to investors' seasonal tendencies.

Given all of that, here are a few under-the-radar picks from the consumer and food sectors that get high marks from my guru-inspired strategies.

Hansen Natural Corporation (HANS): Based in California, Hansen makes a variety of natural sodas, colas, fruit juice smoothies, energy and sports drinks, and juice drinks, including those sold under the Monster Energy and Java Monster brands.

Hansen has upped earnings per share in all but one year of the past decade, and that was during what was a tough 2008 for many consumer companies. (Hansen rebounded to post a new high in EPS the following year.) That consistency is a big part of why my Warren Buffett-inspired strategy is high on the firm. A couple more reasons: Hansen has no long-term debt, and it has averaged a 27.0% return on equity over the past decade -- a sign of the strong management and "durable competitive advantage" Buffett is known to seek in his buys.

Zhongpin Inc. (HOGS): This China-based meat and food processing firm is a small-cap ($673 million), but it has taken in close to a billion dollars in sales over the past year. It specializes in pork and pork products, and vegetables and fruits.

Zhongpin has been producing very strong growth over the past several years -- it's long-term EPS growth rate is 41.1% (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate). But given that growth, the stock is still quite cheap. It trades for just 0.71 times trailing 12-month sales, part of the reason it gets high marks from my James O'Shaughnessy-based growth model. Another key part of this approach is a high relative strength over the past 12 months; O'Shaughnessy found that the combination of a high RS and low P/S ratio allowed you to get stocks that are being embraced by the market, but which hadn't yet gotten too pricey. With an RS of 79, Zhongpin makes the grade.

The model I base on the writings of mutual fund great Peter Lynch also likes Zhongpin. Lynch famously used the P/E/Growth ratio to find undervalued growth stocks. When we divide Zhongpin's price/earning ratio (based on trailing 12-month earnings) of 10.1 by its 41.1% long-term growth rate, we get a P/E/G of 0.25, which easily falls into this model's best-case category (below 0.5).

Lynch also liked to see a declining inventory/sales ratio -- the piling up of unwanted inventory isn't a good sign. Last year, Zhongpin's inventory/sales ratio was 2.8%, which was down from 4.7% the prior year, which this model likes to see.

Ecolab Inc. ( ECL ): Based in Minnesota, Ecolab provides firms in more than 160 countries with cleaning, sanitizing, food safety and infection prevention products and services. Its customers come from a variety of areas, including the food service, food and beverage processing, hospitality, healthcare, government and education, textile care, and vehicle wash industries.

Ecolab ($12 billion market cap) is another favorite of my Buffett-based model. Its EPS have declined just once in the past decade (and that was a minor 3% dip in 2009, which it rebounded nicely from last year). The Buffett-based approach also likes that Ecolab has enough annual earnings ($526 million) that it could, if need be, pay off its $684 million in debt in less than two years. Ecolab's 10-year average return on equity of 21.1% also earns solid marks from the strategy.

Companhia de Bebidas das Americas ( ABV ): Known as "AmBev", this Brazil-based beverage distributor sells beer, soft drinks, and other drinks in 14 countries in the Americas. The firm is PepsiCo International's bottler outside of the U.S., and has a $90 billion market cap.

AmBev gets strong interest from my Lynch-based model, which considers is a "stalwart" because of its moderate 18.8% long-term EPS growth rate and high annual sales ($15.8 billion). For stalwarts, Lynch adjusted the "G" part of the P/E/G to include dividend yield, since these sorts of large companies often pay nice dividends. Thanks in part of its impressive 4.9% yield, AmBev sports a yield-adjusted P/E/G of 0.85, which comes in under the Lynch model's 1.0 upper limit.

Nu Skin Enterprises, Inc. (NUS): Utah-based Nu Skin ($2.2 billion market cap) is a direct selling company that sells personal care, nutrition, and technology products, such as skin creams, supplements intended to fight aging, and a biophotonic scanner that measures carotenoid antioxidant activity. It sells its products through a network of more than 750,000 independent distributors and preferred customers around the world.

Nu Skin gets approval from both my Lynch- and O'Shaughnessy-based models. The Lynch-based approach likes its 35.9% long-term growth rate and 0.54 P/E/G ratio, as well as its reasonable 32.3% debt/equity ratio. The O'Shaughnessy-based approach, meanwhile, likes that it has upped EPS in each year of the past half-decade. It also likes the stock's combination of a 1.4 P/S ratio and a relative strength of 72.

I'm long HOGS.

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


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

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