Consumer Trio: The Lesser Knowns
04/30/2004 12:00 am EST
"With so much information available, it's getting harder to uncover investment ideas that haven't already been discovered by the crowd," says screening specialist Marc Gerstein of Reuters.com . "But it can still be done." Here, he looks at three lesser-known consumer stocks.
"A stock with little or no research coverage can be a great investment opportunity, or a very poor choice. So if you want to dig a bit harder, you have lots of opportunities to discover winning companies and buy their stock before the crowd catches on. To reduce the risk when looking for lesser known stocks, I use screens to get me started. Once I have my list of qualified companies, I'm then more willing to bring personal business knowledge into the picture. On the whole, the consumer area has occupied a greater portion of my attention, so I tend to gravitate toward this area. Here's an overview of some lesser-known stocks in the consumer sector:
"Deckers Outdoor (DECK NASDAQ) has three niche footwear brands; Ugg sheepskin boots that recently emerged as a hot brand, Teva, an outdoor line that includes increasingly popular sport sandals, and Simple a smaller break-even brand that is being enhanced by lower-cost versions of sheepskin products and more sandal offerings. In the shoe business, popularity can have a here-today-gone-tomorrow flavor. But if you get in on the early part of the here-today phase, you can generate some nice investment returns. But don't forget the eventual gone-tomorrow phase. Always keep an eye on the exit.
"Lifetime Hoan(LCUT NASDAQ) makes and markets some widely recognizable kitchen-oriented brands, such as Hoffritz, Cuisinart, Farberware, and Kitchen Aid. You'd think this would be a defensive business given low price points. But you'd be amazed at how easily consumers can resist buying in lean times. So I treat this as a cyclical area. Being small is a double-edge sword. If the company has something on the ball, one of two things will happen. It will get bigger or it will get acquired. Either way, the outcome is pro investor.
"Rubio's Restaurants (RUBO NASDAQ) is in a business we don't like. There are way too many restaurants out there, and that's so even in good times, when consumers are more likely to spend to dine out. But there are two things that can make a restaurant stock worthwhile. One is being in the right segment. There's almost a built-in bias in favor of new concepts; something that often plays into the hands of restaurants that appear in this screen. RUBO, a Baja Mexican chain, seems to fit the mold. And it's very, very tiny, which means it has a shot at enjoying a 'here-today' phase. RUBO also has a pretty bullish technical chart and some noteworthy insider buying.
"In our analysis we also look at institutional ownership. With big-cap stocks, this won't amount to much since practically everybody owns them. But with lesser-known stocks it can be revealing. Among noteworthy institutional shareholders of DECK, I notice RS Investment Management and the Al Frank Fund, both being organizations I respect. For LCUT and RUBO, I notice Royce & Associates as a prominent institutional shareholder, that being my single favorite micro-cap outfit. To me, major positions by outfits like these mean more than Strong Buys by Wall Street analysts. There is a data-reporting lag, so I can't be sure my favorite institutions are sill bullish today. But the fact that they had significant stakes recently goes a long way toward conferring on these less-known stocks an important flavor of legitimacy. Once I have that, I feel more comfortable relying on my own judgment as to whether the investment merit persists as of this point in time."