Consumer Stocks: Shopping for Seconds

These slightly flawed companies may pay off

With all the talk about consumer spending being the economy's salvation, you'd think any company that sells to consumers would be a buy. Upcoming tax rebates of up to $300 for individuals and $600 for couples should make consumer stocks all the more attractive, right?

But that's not how things are shaping up. Consumer staples--such as tobacco, foods, and beverages--are already pricey, since those stocks run up whenever investors fear a slowdown. And consumer cyclicals--things like housing, autos, and retailing--have made gains in anticipation of a better economy later this year.

So, if you're going to make money, you need to buy the stocks that have some flaws--but fixable ones. Jim Gingrich, a household-products analyst at Sanford C. Bernstein & Co., recommends Kimberly-Clark (KMB ), which recently traded at $57.92. The stock is off a 52-week high of $73.25, toppled by earnings disappointments caused, in part, by weak currencies in Europe. Gingrich thinks Kimberly could climb back to $75 within 12 months as new products, such as more-absorbent diapers for Europe, help clean up its bottom line.

Tupperware (TUP ) also looks promising. The plastic container company sells at $22.69, with a modest forward price-to-earnings ratio of 12. John Schneider, who runs the PIMCO Renaissance Fund, says this stock has also suffered currency-related earnings woes. He thinks the currency problem will ease, and growth overseas is strong. On the home front, the company has started selling at shopping mall kiosks to extend its reach beyond the party circuit.

SWEET MUSIC. Among the cyclicals, Schneider recommends York International (YRK ), an air-conditioner maker with $4 billion in sales. The stock, at $33.43, could reach $56 within 12 months, he says. The reasoning: York's new executive team is determined to improve earnings.

Another home-improvement play is Masco (MAS ), which makes kitchen and bathroom faucets and cabinets. The stock, at $24, is a favorite of fund manager Ronald Muhlenkamp of the Muhlenkamp Fund. The attraction, he says, is Masco's low valuation--a below-market p-e of just 20.

You also can find deals among down-market retailers. Legg Mason's Sally Wallick likes Family Dollar Stores (FDO ), whose all-important same-store sales rose 2.8% in May, well above the typical gain. Wallick says the company's debt-free balance sheet and strong management should help it prosper in any economic climate. The stock recently traded at $26.74, with a p-e of 24. Brent Rystrom of U.S. Bancorp Piper Jaffray recommends Dollar Tree Stores (DLTR ) for similar reasons.

Want to hedge your bets in case the economy doesn't strengthen? Buy AutoZone (AZO ), says money manager Steven Check of Check Capital Management, based in Costa Mesa, Calif. Check thinks this auto-parts retailer will see earnings growth of 15% in the next 12 months--a gain he thinks is not reflected in its low p-e of 17. Since AutoZone sells replacement parts, a continued slowdown could actually help, as motorists fix older cars rather than buy new ones.

U.S. Bancorp's Rystrom offers another weather-proof suggestion: Guitar Center (GTRC ). Sales at the $800 million music store chain jumped 21% in the quarter ended in March, compared with the same quarter a year ago. The company could keep humming even in a downturn, Rystrom says, as laid-off workers buy guitars to strum away their blues.

By Carol Marie Cropper

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