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By Ryan Leggio | 06-21-2010 01:51 PM

Better Buys in Consumer Discretionary Stocks

Stock prices have come down while earnings have gone up, making valuations more attractive today in the sector, says RS Growth's Allison Thacker. Plus: a pick in beauty supply.

Ryan Leggio: Hi, I'm Ryan Leggio. I'm the Mutual Fund Analyst at Morningstar, and with me today, is Allison Thacker. She is a co-portfolio manager for RS Growth.

Hi Allison, thanks so much for joining us.

Allison Thacker: Hi Ryan, thanks for having me today.

Leggio: Well, it's been a few months since you were last in Chicago from San Francisco, which is where your firm is based, and the market has run up and then in the last few months settled down a little bit. Can you talk a little bit about how you are navigating the market swings and where you are finding values today, especially in the small- and mid-cap growth areas?

Thacker: Well, it has been a very volatile last few years and so to some extent, it's not surprising that we are having a period of volatility again in the stock market. I think, overall economic metrics are improving, but not at a dramatically fast pace, and so the early part of the year, the runup actually surprised us with its strength and low volatility.

And so, this pullback has provided us an opportunity to invest in some areas that we had felt were somewhat expensive as we entered the year 2010.

Leggio: And one of those, consumer discretionary…?

Thacker: One of those areas is consumer discretionary, and it was a big area of outperformance for our funds in 2009, with great stock selection, and we felt that we needed to take profits at the end of the year. At the end of 2009, stocks were trading at the high end of their historical valuation ranges. We weren't seeing a very strong jobs picture that was going to support those valuations, and so we did take profit in a lot of our names that had driven performance in 2009.

Entering 2010, I would say, we've been very surprised at the strength of the consumer discretionary sector this year. Our stocks have continued to do fairly well, within the sector, but given the valuations, we were somewhat underweighed in the early part of this year in that area.

The recent volatility has been a great opportunity for us to invest in companies again within this area that have our minimum $2 of upside for every $1 of downside, when we set price targets.

And I think there's two reasons that, that is going on. One is that stock prices have pulled back with the market recently. Additionally, earnings have come in extremely strong, and so we have seen both the P come down and E go up, and so valuations are quite a bit more attractive today.

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