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Consumer Stocks Back In Focus

|Includes:LCUT, Perry Ellis International Inc. (PERY)

The Federal Reserve's decision of winding down its bond buying program in a phased manner, starting January, sent a clear indication of the bank's reading that the markets are ready to do well without the central bank's financial assistance. It is also an important psychological turning point for investors which have been predicting this move for the last six months. As a result, there may be a temporary pressure on interest rate sensitive sectors, but consumer stocks such as Perry Ellis International. Inc. (NASDAQ: PERY) and Lifetime Brands Inc. (NASDAQ:LCUT) are likely to do well as average transaction sizes are smaller and usually not directly linked to interest rates.

Apparel company Perry Ellis International did not have a great year and looks destined to finish the year with sharp cuts in profitability. In the first nine months of 2013, its profits almost halved to $5.5 million while revenues declined 2.1 percent to $696.1 million. The company is currently struggling with a pruned portfolio and selling and administrative costs which have not gone down. However, the decline in the top line is small and offers hope for a revival next year. The company's stock plummeted more than 20 percent in November after it lowered guidance for the second half of the current year. At current prices, the stock is valued at just 11.6 times its forward earnings while offering a 40 percent discount to its book value. With respect to next year, earnings are likely to stabilize as cost control measures start translating into earnings growth while a gradually improving demand scenario pushes top line. To its credit, the company has a strong line up of brands including Nike swimwear.

A relatively stronger and less risky bet would be kitchenware manufacturer Lifetime Brands Inc., which has gained strength through the year with a YTD advance in excess of 50 percent. During the latest quarter, the company made strong gains in both sales and margins, a trend that is likely to spill over into the holiday season. Revenues during the period grew 11 percent to $142.2 million, but operating income jumped 57.8 percent translating into a margin of 8.2 percent. A reasonable debt equity ratio of 0.6 has helped the company in controlling costs. The company has a share repurchase program in place and bought back shares worth nearly $3 million this year. Since the stock has gained substantially, Lifetime Brands is going slow on buyback. At a forward price earnings ratio of 11.2, the stock appears priced at a discount from long term growth perspective.

Stocks: PERY, LCUT