Rules of the Game: Another Set of Discretionaries

 | Feb 22, 2013 | 3:00 PM EST  | Comments
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I recently wrote about strength in consumer discretionaries, a sector that has generally seemed resilient despite much hand-wringing over consumer spending. I'm not necessarily a fan of sector exchange-traded funds, although they can be useful to gain exposure to certain areas of the market showing potential.

I want to continue my focus on the consumer arena, but don't get me wrong, I am not suggesting that these are stocks to rush out and buy. If you already have exposure to the sector elsewhere, then it may not be something you have to add to. But if you like to add a portfolio of individual stocks alongside your fund holdings, there are a few large-cap consumer names worth a look.

From consumer staples, Colgate-Palmolive (CL) rallied to a new high in each of the past three sessions. The company has a solid, if not spectacular, record of earnings growth in the past eight quarters. This year, analysts eye earnings of $5.77 per share, a gain of 8% over 2012. Next year, that's seen growing another 11% to $6.39 per share. Dividends have been accelerating in the past several years, and some analysts anticipate that trend continuing. For investors concerned about buying at a new high, potentially just ahead of a pullback, watching for moving-average support is often a good idea.

While a consumer staple such as Colgate can be counted on to deliver reliable sales of toothpaste, shampoo and dish soap, even in a poor economy, that's not necessarily the assumption we all make about consumer discretionaries.

But look at Starbucks (SBUX). Purchases of venti mocha soy lattes have remained robusta throughout less-than-frothy market conditions. Bad coffee puns aside, Starbucks' consolidation tends to worry those with a trading mindset, or those who like to fret over a somewhat lengthy base formation. Instead, focus on analysts' earnings estimates for the next two years. In 2013, the company is expected to brew up (sorry, couldn't resist) earnings of $2.16 per share. That would mark a 21% year-over-year gain. Next year, that's seen growing another 21% to $2.63 per share. Dividends have accelerated in the past four years, a good fundamental indicator. Starbucks' return on equity is 29%, a healthy number.

For investors looking for a solid addition to a large-cap portfolio, another consumer name with potential is Walgreen (WAG). Like Colgate, Walgreen has been edging steadily higher recently, and is trading at its best levels since July 2011. For a large-cap, the stock has a fairly erratic trading character, evident on a weekly chart. Though earnings performance has been lackluster in recent quarters, with year-over-year earnings on the decline, Wall Street expects income of $3.26 per share this year and $3.69 per share in 2014. Those would be increases of 26% and 13%, respectively.

The same admonition that applies to Colgate applies to Walgreen: Investors who are concerned they are buying too high could continue monitoring the stock, watching for support at a key moving average. I don't particularly share that concern at these levels, but I know many don't like purchasing after a run-up.

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