I remember a wildly successful strategy in 2003 that could get a reprise in 2009: Buying stocks from a beaten down sector below book value. While in 2003, the sector in question was Technology, this time it is Consumer Discretionary.
In the table below (click to enlarge), I include 15 companies generated from a screen I ran on StockVal. The goal was to identify companies with strong balance sheets that were expected to make money next year and that weren't loaded up with intangible assets. Specifically, here are the parameters I employed:
- Market Cap > $50mm
- P/B <1
- P/TB < 1.2
- D/C <10%
- PE < 25
Clearly, the typical name here is very attractive on several measures, with a median PE of 10.5.
By other metrics, the stocks are about 1/2 their usual valuation. While this list has several candidates for strong returns when the economy rebounds, dilligent investors need to be aware that some have substantial lease commitments not reflected in their balance sheet.
An extended downturn could weigh heavily on profitability. Further, one needs to be comfortable that the inventory levels are manageable, as liquidation values, especially in a depressed economy, could be well below stated levels.
Many of these names are clothing or shoe retailers, areas that have been hard hit already due to the sharp rise in gasoline prices earlier this year. While not every name on this list will work, I am confident that several will, including the two that I own.
In general, investors may want to relax some constraints to broaden the list. If one is willing to accept a slightly higher valuation relative to book value but still demand low debt and high cash, the number of stocks jumps dramatically.
Big picture: Undoubtedly, selling will leave consumer stocks undervalued and in a good position for the next upturn. The bigger question is when!
Disclosure: Long MW and SCVL.