Consumer stocks perk up after a bloody year

NEW YORK (Reuters) - Bargain prices and upbeat earnings surprises have enticed investors to start browsing among consumer stocks again after a confluence of macroeconomic events hammered the sector over the past year.

Following a time when plunging home values, rising food and gasoline costs and a crippling credit crisis have sent shares of companies exposed to U.S. consumers tumbling, some investors are starting to see pockets of possibility.

Whirlpool Corp (WHR.N), PepsiCo Inc (PEP.N), Anheuser-Busch Cos Inc (BUD.N), Mattel Inc MAT.N, Amazon.com Inc (AMZN.O) and RadioShack Corp (RSH.N) topped Wall Street's profit estimates in recent days, with the appliance maker, soft drink maker and online retailer affirming their full-year outlooks.

Shareholders were handsomely rewarded, with Whirlpool shares rising 13 percent, Amazon jumping 16 percent, and RadioShack gaining 14 percent.

"We're not out of the woods yet, but I think you can say hopefully we've found bottom here," Edward Jones analyst Jack Russo said. "It just depends how long we scrape along the bottom. Hopefully these earnings reports will go a little bit toward restoring some confidence."

Russo said investors are nervous about consumer spending, which makes up two-thirds of U.S. economic growth, but that caution is already priced in, especially in stocks of consumer product makers like Coca-Cola (KO.N), Pepsi and Procter & Gamble Co (PG.N), whose stocks are respectively down about 15 percent, 11 percent and 12 percent so far this year.

"The consumer sector sold off first and has sold off longer than finance," said Janna Sampson, co-chief investment officer with OakBrook Investments in Lisle, Illinois. "We were anticipating a recession, so we actually started to see that sell-off early."

Sampson said she liked shares of Wal-Mart Stores Inc (WMT.N) and McDonald's Corp (MCD.N), which are "a little less sensitive to the economic cycle," and Home Depot Inc (HD.N) and Harley Davidson Inc (HOG.N), which have fallen so much they're more likely now to rise, even without a home pricing recovery.

Gary Bradshaw, a portfolio manager with Dallas-based Hodges Capital Management, said he expects stocks to rebound before the year ends, given the Federal Reserve's rate cuts and signs that oil prices may have peaked.

"Typically, the consumer has a way of bailing themselves out. If we get these oil prices cracking, I think you'll see a whole different attitude among consumers and they'll continue to spend. I think some of these stocks will certainly come back," Bradshaw said. He said he bought Coke shares, which are trading at their lowest multiple in two decades, for his separately managed funds last week.

U.S. light crude CLc1 traded on Thursday at $125.30 per barrel, down 15 percent from its record high on July 11.

BIG SALES AT THE MALL

"When everything is falling apart, it's the best time to buy," said Sarah Henry, retail analyst at MFC Global Investment Management, citing low retail valuations and the Fed ending its easing cycle as "buy signals." As well as Wal-Mart, she liked Target Corp (TGT.N), Nordstrom (JWN.N) and Nike Inc (NKE.N).

Mark Montagna, a retail analyst with CL King, has "strong buy" or "accumulate" ratings on Ross Stores Inc (ROST.O), TJX Cos Inc (TJX.N), Coldwater Creek Inc (CWTR.O), Gap Inc (GPS.N) and Limited Brands Inc (LTD.N).

"In this environment we like the retailers that have strong balance sheets and not a lot of debt," Montagna said. "We are also in favor of retailers who are cutting their inventories in an effort to manage markdowns."

Not all good buys, however, are as well known.

"There are little niches in what is called 'discretionary' that may be less discretionary than you think," said Laura Richardson, a consumer analyst with BB&T Capital Markets.

She pointed to health club operators such as Life Time Fitness Inc (LTM.N) and Town Sports International Holdings Inc (CLUB.O), beauty supplies retailer Sally Beauty Holdings Inc (SBH.N) and "rent-to-own" chains Rent-A-Center Inc (RCII.O) and Aaron Rents Inc RNT.N.

NOT FOR EVERYONE

Some analysts and investors said the economic climate is still too dicey to rush in to consumer stocks, especially since the continuation of food inflation and stagnating job growth could chill the all-important holiday shopping season.

"I would expect this to be a difficult holiday season," said Sasha Kostadinov, portfolio manager at Shaker Investments in Cleveland.

"While we are seeing some sell-off in energy prices here, it is likely that core energy and food prices are going to stay at higher levels than they were last year, through the holiday season. Unless the federal government wants to keep on writing stimulus checks, consumers aren't going to be able to spend as much as they did last year," he said.

Mark Coffelt, Austin, Texas-based portfolio manager of the Empiric Core Equity Fund, said he owns no consumer discretionary stocks and is not planning to until there is more evidence that things are looking up.

"In previous years I've bought into the depressed stocks," Coffelt said. "But it just makes you depressed."

(Additional reporting by Nicole Maestri and Aarthi Sivaraman in New York, Karen Jacobs in Atlanta and Alexandria Sage in San Francisco; editing by Patrick Fitzgibbons and Braden Reddall)