Retail Stocks: Seeking Out Smaller Names

by: Marc Gerstein

The U.S. consumer is back, helped, probably, by lower gas prices and interest rates that didn't really get intolerably high. Last week, McDonald's Corp. (NYSE:MCD) favorably surprised Wall Street with stronger-then-expected earnings and a positive outlook, as did Apple Computer Inc. (NASDAQ:AAPL). On Tuesday, Coach Inc. (COH) did likewise. Even conventional, or non-electronic, toymakers Hasbro Inc. (NASDAQ:HAS) and Mattel Inc. (NASDAQ:MAT) got into the act. This is likely a good sign, at least for the next few months, for major consumer names, the ones most investors have heard of. It can also spell opportunity for those who like to venture beyond the beaten path.

Stocks appearing in the Reuters Select stock screens have, on balance, risen 213.6 percent, versus 0.40 percent for the S&P 500 since we began tracking performance as of Jan. 28, 2000. Performance figures are based on assumed monthly holding periods, assume equal weighting, and do not count commissions or dividends.

But for much of the period, it was the smaller companies, the ones that tend to fly under the radar, that were strongest.

We see this in the overall stock market: From Jan. 28, 2000 through Oct. 20, 2006, the Russell 2000 rose 52.73 percent.

We also see it among stocks that met Reuters Select screening criteria. The big names certainly stood up well, having risen 72.49 percent since early 2000, outpacing blue-chips in general and the Russell 2000. Mid-cap stocks did a bit better, having risen 104.27 percent. But it was the smaller names that shined: Reuters Select small-cap stocks rose 232.37 percent, and micro-caps soared 405.97 percent.

Investors who expect moderate interest rates and low, by recent standards, gas prices to help the consumer finish 2006 with a flourish have plenty of recognizable stocks to choose from. Besides the ones noted above, other familiar faces include Best Buy (NYSE:BBY), Starbucks (NASDAQ:SBUX), Whole Foods Market (WFMI), American Eagle Outfitters (AEOS) and so forth. But those who wish to swing for the fences by combining the consumer and small-micro-cap themes, may wish to consider some stocks on the table below, which lists top-ranked Reuters Select consumer stocks with market capitalizations below $1 billion..

The phrase "top-ranked," refers to the rankings we apply to prioritize among stocks appearing on the screens. This is based on two broad factors: screen pedigree, which counts for 75 percent of the overall score, and data measures, which count for the remaining 25 percent.

Screen pedigree draws our attention to companies appearing on multiple screens and/or screens that have been performing best most recently, since the end of July 2006.

For example, Sales Growth Leaders was top ranked among our 19 screens during this period. As a result, a stock appearing in this screen gets a score of 19. A score of 1 would be assigned to a stock appearing in the lowest performing screen (which, over this span, was Relative Momentum). If a stock appears in more than one screen, we add the scores attributable to each screen in which it appears.

Data measures help us identify companies that rank highly according to various gauges of business fundamentals and market sentiment:

  • Short covering (weighted 5 times)
  • Bullish analyst ratings (weighted 4 times)
  • Trailing 12-Month Relative (company-to-industry) P/E (weighted 3 times)
  • Relative (company-to-industry) 5-year sales growth rate (weighted 3 times)
  • Relative (company-to-industry) 5-year return on investment (weighted 3 times)
  • Favorable change in analyst rating, past 8 weeks (weighted 2 times)

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Disclosure: At the time of publication, author did not own shares of any of the aforementioned companies. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.