Alan Brochstein identifies 8 Consumer stocks that have dropped more than 20%
We are more than halfway through earnings season, which has been rather eventful thus far. One of the big stories has been weakness among high-profile Consumer names, like Coach (COH), Chipotle (CMG), and Starbucks (SBUX), all of which have plunged after reporting earnings in July after having traded to all-time highs earlier this year.
Consumer Discretionary stocks have been beating the market this year, with the S&P 500 members of that sector up 11.7% in 2012, which is 2% better than the overall market. In July, though, the sector actually declined somewhat, falling 0.3% while the S&P 500 gained 1.3%. The stocks have likely benefited from relatively low international exposure (given the concerns about growth overseas as well as the strengthening dollar) as well as stable consumer spending.
It seems to me that some of the extreme action in the sector is probably profit-taking rather than the start of a new trend, so I decided to screen for stocks that have sold off but appear to be in longer-term bull markets. Using Baseline, I established several different parameters to help me identify some stocks that might just be on sale. Here is what I did:
- Consumer Discretionary Stocks from the S&P 500 index
- 3-Month Price Return < -10%
- Price < 80% of 52-week High (down more than 20%)
- 2-year Price Return > 25% (Beating S&P 500)
The screen resulted in 8 companies that met the criteria:
Please keep in mind that these are not recommendations. I have sorted the list from most to least in terms of price decline and have included several other variables to help identify which ones might be worth investigating further.
First, I included the net debt to capital, and six have more cash than debt, which is positive. The other two have relatively low debt burdens, which is important, especially when evaluating stocks that are declining in price.
I also included the YTD price return. I had required that the stocks be beating the market over the past two years, but none of the stocks, after their recent declines, is beating the S&P 500 this year. Three, though, which I have highlighted, are up so far in 2012.
I shaded in green the three stocks with forward PE ratios below 14X, while I marked in red the two that are above 20X. In the case of CMG, while the PE is high at nearly 30X, the earnings growth is expected by analysts to be 22% in 2013, suggesting that the valuation may be warranted. I also included the ratio of the PE to the 10-year median. Most are substantially below the median, which is similar to stocks in general, but three are at or above their medians.
Finally, I included what is called the analyst revision for the current year. This compares the current estimate to what it was three months ago. I highlighted in green the two that have actually increased and in red those that have declined more than 3%. Interestingly, a couple of stocks have actually seen their estimates increased. The very worst change has been 6% for Ralph Lauren (RL), which has seen its price fall 16% over the same time-frame.
I didn’t include the one-year returns, but it’s worth noting that O’Reilly Automotive (ORLY), SBUX and RL have at least matched the market. Bed Bath Beyond (BBBY) is trailing just slightly, while the other four have lagged by 17% for CMG to 50% for Fossil (FOSL).
Screening is a tool to identify stocks to study more closely for potential investment. In this case, we have identified 8 stocks that might be attractive after falling sharply in price over the past few months. I like the idea of being somewhat contrarian in the Consumer Discretionary sector, which tends to be volatile, and focusing on stocks that are in longer-term bull trends but correcting might offer a potentially rewarding opportunity if the longer-term trend remains intact.
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: No position in any stock mentioned
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