Be Discretionary

 | Jul 10, 2012 | 10:30 AM EDT
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The continuing drama from Europe and a possible slowdown in China is making for a very difficult investing environment right now. Manufacturers such as Ford (F) have announced they are being more negatively impacted by the slowdown in Europe than investors thought a few months ago, which has affected stock prices. Commodities have fallen considerably in the last few months as projections for worldwide growth are being revised downward. I am starting to take some positions in consumer discretionary stocks that do not have much exposure to Europe and could benefit somewhat by falling gas prices domestically. Here are two stocks that fit these criteria that have cheap valuations, solid balance sheets and good growth prospects.

Arctic Cat (ACAT) manufactures snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name

Four reasons ACAT offers investors value at $37:

  • The company has a pristine balance sheet with more than $60 million in net cash (approximately 12% of market capitalization) on the balance sheet. An insider also made the first insider buy of 2012 in mid-June.
  • Earnings are on a sharp uptrend. The company made $1.72 per share in 2011. But analysts expect EPS of $2.71 in 2012 and $3.35 in 2013.
  • Revenues are also expected to increase in the low teens for both 2012 and 2013. ACAT has a five-year projected price/earnings/growth ratio of less than 1 (0.89) as well.
  • The company has almost quadrupled operating cash flow over the last two fiscal years and the median analysts' price target on Artic Cat is $45 a share.

G-III Apparel Group (GIII) manufactures and markets women's and men's apparel primarily in the U.S.

Four reasons GIII is a bargain at $26 a share:

  • The stock sells for just 8.6x forward earnings, which is cheap and a discount to its five-year average (11.0).
  • Analysts expected the company to grow revenues between 8% and 10% in 2012 and FY2013. The stock sports a low five-year projected PEG of just 0.55.
  • The median analysts' price target on GIII is $33, and price targets for the five analysts that cover the stock are in a tight range of $31 to $35 a share.
  • GIII has little debt and the company has been able to more than double earnings over the last five years, despite the very difficult retailing environment. It also averaged more than 20% revenue growth over that time span. Investors have an opportunity to buy these shares at a discount here.

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