Analyzing Last Month’s Top Performing Consumer Stocks
Sandeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
US consumers remain uncertain about the broader macros yet they seem to have a healthy enthusiasm for shopping. Since recession, consumer spending has improved substantially. Consumer spending got off to a positive start in the third quarter and offers hope that economic growth may accelerate this quarter. I screened last month’s top performing consumer stocks and analyzed their further upside potential. 17 large-cap and mid-cap consumer companies fulfilled the criteria set (more than 10% gains over the last month) of which the following three companies appears to have solid upside potential and offer good investment opportunities.
Coach (NYSE: COH)
Coach’s stock saw a huge downfall after the company reported 4Q results with a disappointing North American same store sales (SSS) growth (1.7% vs. consensus estimates of 6.4%), but it is recovering well and has gained over 12% in the last month. Elimination of couponing at factory stores lead to weaker sales in last quarter. However, factory store performance is improving since couponing resumed and I expect good results in the next quarter. Coach has evolved from a leather goods manufacturer to a retailer and wholesaler of branded handbags, accessories, travel products, and footwear. The company has made a noteworthy progress on its key initiatives of aggressively growing its international business and expanding its market share in Men’s accessories category. Going forward, the company seems focused to broaden its lifestyle image, heighten emotional consumer connections, and further differentiate using its heritage. By doing so, Coach could create an opportunity to expand non-handbag categories, enhance global brand positioning, and retain younger customers. In addition, the company provides a 1.9% dividend yield, and has a strong balance sheet which may be used for share repurchases. The stock has a PEG ratio of 1.17 and looks fairly undervalued at the current levels.
Green Mountain Coffee Roasters (NASDAQ: GMCR)
Green Mountain has gained over 30% over the last month; making it the top performing consumer stock. Despite such a strong performance, I think there still remains a good scope for further appreciation. Despite having a 20%+ expected growth rate over the next five years, the company is trading at a forward PE of 12.81. Thus, it is significantly undervalued on a PEG basis (PEG ratio is just 0.53). Though I acknowledge the company will face a tougher competition with the expiration of patents, but the company’s growth profile remains attractive. There is still meaningful room for K-Cup to increase its household penetration. I think the value of Green Mountain’s Keurig brand is underappreciated. Since Keurig owns the brewer technology through 2023, Keurig has the opportunity to continue innovating, which will serve to limit competitors’ share of the total Keurig platform and maintain current licensed partners’ interest. Moreover, the newly implemented forecasting methodology will boost margins as better demand forecasts will improve the alignment of labor, increase efficiency and margins. In addition, the announcement of a significant share repurchase program should continue to support the stock.
Lululemon Athletica (NASDAQ: LULU)
Last week, Lululemon reported strong Q2 results with an impressive SSS growth of 15%. After beating the consensus EPS estimate in both the 1Q and 2Q, the company raised its FY12 guidance and as a result the company’s shares are nearing all-time high. Going forward, Investors are concerned as the company is trading over 34 times forward earnings. However, I believe that Lululemon represents one of the best growth stories in retail and there is a further upside potential to the stock. Lululemon has very small unit base and remains an under-penetrated concept early in its growth cycle. The company enjoys a leading position in the fast growing yoga market and the company is also likely to benefit from women’s increasing tendency to wear its goods for non-athletic uses. Thus, I believe the company has huge potential for same store sales growth and aggressive unit expansion.
Thus, Lululemon’s high valuation seems justified due to its strong positioning in the rapidly growing yoga market and huge unit expansion opportunities. Green Mountain and Coach are low PE stocks with a limited risk and strong upside potential. Hence, I recommend buying these stocks despite their recent outperformance.
Find Out More
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sandeep2gupta has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Lululemon Athletica and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Coach, Green Mountain Coffee Roasters, and Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.