Three Cheap Consumer Stocks

 | Apr 17, 2012 | 3:30 PM EDT
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The American consumer has been back from dead for quite some time now. Long gone is the kind of confidence that existed when home prices were at all-time highs and folks were enjoying increased spending power from second and third mortgages. Still, consumers appear to be more confident each and every day.

National restaurant data point to an increase in consumer traffic and retail sales are picking up at various levels depending on the product.

Against this backdrop is a collection of small, cheap consumer stocks that could be poised to pop at any moment.

An important caveat, by cheap I don't necessarily mean undervalued, but rather a business with a quality balance sheet and the potential to boost or regain profit. There is a reason why Nordstrom (JWN) trades at 15x forward earnings and a 52-week high while Best Buy (BBY) trades for 6x forward earnings yet sits at a 52-week low. Folks are spending money at Nordstrom and they are not at Best Buy. Until Best Buy gets its act together, assuming they can in the cutthroat business of electronics retailing, it's valuation multiples don't mean much.

Retailing, regardless of the product line, is an extremely competitive business with little or no intellectual property, thin margins and rapid inventory obsolescence. Strong sales are the Holy Grail. If the consumer keeps improving, that's good for retailing. In the meantime, having a great balance sheet can make all the difference. That's what makes small-cap discount retailer Stein Mart (SMRT) an intriguing play. Stein Mart offers brand name and off-brand fashions at discounted prices. For me, I find it a great place to pick up things like nice dress socks and golf apparel. The company boasts a $270 million market cap, a debt-free balance sheet and nearly $100 million in cash. The company trades at book value, makes money and generates even more in cash flow. A lot of good things can happen in such a situation.

Wet Seal (WTSLA) is a mall-based retailer of fashion and accessories for teens. The company's stores operate under the Wet Seal and Arden brand names. There's probably nothing more competitive in retailing than selling to the young female shopper. Shares in Wet Seal are trading near an all-time low of $3.34. At that price, the company is valued at $300 million. Again, the balance sheet is debt free but loaded with nearly $150 million in cash. Over the past three years, free cash flow has averaged some $25 million a year. The company currently trades for less than 3x EBITDA to enterprise value, quite low even by retailing metrics. All it takes is for one investor or an opportunistic group of investors to look closer at the valuation and shares could trade for $5.

Tuesday Morning (TUES) sells a hodgepodge of decorative household accessories at deep discount prices. The share price has been a consistent laggard for some time, but the numbers are worth mentioning for bargain hunters. The market cap is $160 million while tangible equity is $260 million, of which $60 million is in cash. The company is debt free. The company has earned about $10 million in profit in each of the last two years, but inventory charges killed cash flows in 2011. Selling discounted merchandise is certainly a good thing in this price-sensitive environment. The bad thing is that names like Hobby Lobby and TJ Maxx are doing the exact same thing with great success.

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