Stuff Your Stocking With Out-of-Favor Bargains

This article first appeared in the December 2010/January 2011 issue of Morningstar Advisor magazine. Get your free subscription today!

It's holiday time, and to go along with the bombardment of advertising, promotions, and articles about must-have toys, here's a screen that looks for attractive consumer-related investments.

With high unemployment and a weak housing market, it's easy to see why an investor's initial reaction might be to avoid consumer- dependent companies. We have yet to see significant and definitive signs of an economic recovery, and every economist has a different opinion on how long the weak economy will prevail. The uncertainty presents a good time to go shopping for bargains, and investors can pick up some high-quality companies at discounted prices.

(Sector = Consumer Services
Or Sector = Consumer Goods)

We start our screen by restricting our list to only consumer-services or consumer-goods stocks. This will leave us with more than just traditional consumer discretionary companies, it will also include everything from auto manufacturers to grocery stores.

And Total Return 1 Year < 0

Next, we look for stocks that have been laggards so far in 2010. Most stock indexes have posted middle- to high-single-digit returns, so stocks meeting our criteria will have underperformed by a meaningful amount. Buying stocks that are temporarily unloved or out of favor by the market can be very profitable; of course, this strategy assumes that the underlying business is still healthy and future prospects are attractive.

And Morningstar Rating > 3