A few standouts: Tuna Amobi says great stock values sometimes lie in out-of-favor sectors.Will they or won't they? The ongoing speculation of whether the Fed will cut interest rates later this year has helped fuel recent market volatility. But the likelihood of such a cut seems to have dimmed, and that's cast a shadow on several sectors. It's also made the job of Standard & Poor's senior equity analyst Tuna Amobi that much harder. Based in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , Amobi covers a number of industries that fall within the "consumer discretionary" sector. The group spans a wide range and includes companies such as home builders, automobile manufacturers, cable television operators, and motion picture studios. Essentially, the sector puts out goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. that people don't necessarily need to get by but will certainly use when they have the chance--and enough disposable income disposable income Portion of an individual's income over which the recipient has complete discretion. To assess disposable income, it is necessary to determine total income, including not only wages and salaries, interest and dividend payments, and business profits, but also . S&P is currently lukewarm on the sector but Amohi says a hit of hunting can unearth some very attractive values. What qualities help stocks stand out in the current market? Several things. First, look for premium brands. They are widely recognized and help companies create additional value. It is good for a company to operate in a niche market A niche market also known as a target market is a focused, targetable portion (subset) of a market sector. By definition, then, a business that focuses on a niche market is addressing a need for a product or service that is not being addressed by mainstream providers. it can dominate. Sound finances are critical, and a strong balance sheet gives management the flexibility to leverage their current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. to boost earnings. Additionally, a stock's valuation is important: A company that is undervalued Undervalued A stock or other security that is trading below its true value. Notes: The difficulty is knowing what the "true" value actually is. Analysts will usually recommend an undervalued stock with a strong buy rating. relative to its peer group has a certain attraction. Finally, it is important that management demonstrate confidence to execute its vision, even in the face of challenging times. Finding good consumer discretionary stocks may seem like searching for a needle in a haystack For the epidode of the TV series House, see . A needle in a haystack is an English idiom that refers to an object (or a person) that is difficult to find because it is lost, mixed in, or buried within a much larger space, mass, crowd, or group of some other objects. , but the best names will certainly share some of these qualities. Your firm isn't very bullish on the consumer discretionary sector, is it? We currently recommend underweighting the industry group. Standard & Poor's says real gross domestic product growth is on course to drop to 2.2% this year from 3.3% in 2006, which will affect demand. Individual industries have their own problems as well. Homeowners are finding it more difficult to bank on the equity they've paid into their mortgages. As a result, we think they will cut back on consumption and expenditures on cars and furniture. High interest rates will probably also cut into consumer spending for the foreseeable future. Is the news all bleak? No. There are niches that are doing well. Filmed entertainment is on a roll. Major studios should enjoy a relatively strong summer season. Luxury goods have managed well. Cable companies with their "triple-run" packages of cable, Internet, and telephone service are another bright spot. How do your three picks stand out? All three exhibit several--if not all--of the attributes I spelled out. First, there's The Walt Disney go. (DIS), which is composed of strong brands: ESPN ESPN Entertainment and Sports Programming Network , ABC ABC in full American Broadcasting Co. Major U.S. television network. It began when the expanding national radio network NBC split into the separate Red and Blue networks in 1928. , Disney, its world-famous theme parks, and Pixar. It's reaping the benefit of titles such as Cars and Pirates of the Caribbean This article is about the franchise. For other, more specific uses, see Pirates of the Caribbean (disambiguation). For real pirates, see Piracy in the Caribbean. Pirates of the Caribbean . Under the direction of CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. Robert Iger, Disney has been very aggressive at capitalizing on new media platforms. What about Disney's finances? Disney is in top-notch financial shape. Management is disciplined and the company's debt is low. Disney's price-to-earnings ratio of around 17 to 18 is in line with the market and a stock buyback Stock buyback A corporation's purchase of its own outstanding stock, usually in order to raise the company's earnings per share. stock buyback See buyback. program should help push shares to our 12-month target of $45. Why choose Group 1 Automotive Group 1 Automotive, Inc. NYSE: GPI is a Fortune 1000 company, based in Houston, Texas and founded in 1997. It is one of the five largest automotive retailers in the United States with 143 dealerships in 14 states. Inc. in a sluggish auto market? What's the catalyst? Group 1 (GPI (Graphical Programming Interface) A graphics language in OS/2 Presentation Manager. It is a derivative of the GDDM mainframe interface and includes Bezier curves. ) owns car retailers--luxury and import dealers that happen to be positioned in a niche that is currently doing well. Demographics help, too: Baby boomers are spending more and more on high-end vehicles. Group 1 has been on an aggressive acquisition spree and we expect it to keep that up at a pace of about $500 million a year. That helps to cut costs from consolidation. Shares are trading at around 10 times our 2007 earnings estimate, a 10% to 15% discount to the group, which currently trades at 11 or 12 times the coming year's profits. What do you like about Tempur-Pedic International Inc.? Tempur-Pedic (TPX TPX - Terminal Productivity eXecutive ) has landed upon a niche market in a slow growth area. The outlook for home furnishings is slow, just like that of the housing and automobile markets. Additionally, the bedding and innerspring mattress industry is a very mature business with the likes of Scaly scal·y adj. 1. Covered or partially covered with scales. 2. Shedding scales or flakes; flaking. scaly skin condition characterized by scales; scalelike. , Serta, and Simmons fighting it out. Tempur-Pedic, meanwhile, has found a niche in the production of elastic foam mattresses and pillows--a high-end segment of the market that has produced 33% compounded annual sales growth for the company over the last four years. That's extraordinary. What's more, low inflation and low unemployment help keep demand steady. A weak U.S. dollar helps because the company generates one-third of its sales overseas. What about Tempur-Pedic's valuation? Tempur-Pedic trades at about 17 times our 2007 earnings estimate, while peers such as Ethan Allen and Leggett & Platt are in the 20 to 21 range. We think the stock is a good value in light of our average annual sales growth estimate in the low teens for the next few years. For real-time Updates of the stock Picks column, visit www.blackenterprise.com/investing.
Amobi's Picks
52-week
price
range 2007 2007
Company Price Est. P/E
(Ticker) (*) Low High EPS Ratio
Group 1 $41.07 $39 $61 $3.88 10.6
Automotive Inc.
(GPI)
Tempur-Pedic $26.31 $13 $29 $1.56 16.9
International
Inc. (TPX)
The Walt $33.79 $28 $37 $1.88 18.0
Disney Co.
(DIS)
Company
(Ticker) Comment
Group 1 Aggressive growth of the Houston-
Automotive Inc. based automotive retailer bodes well
(GPI) for future performance.
Tempur-Pedic Shares of the Lexington, Kentucky-based mattress
International company are attractively priced relative
Inc. (TPX) to its peers.
The Walt The Burbank, California-based entertainment giant is
Disney Co. making the most of new media platforms.
(DIS)
DATA AS OF 6/4/07 SOURCE: YAHOO! FINANCE
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