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By Jason Stipp | 01-13-2011 12:10 PM

Comparison Shopping in Consumer Stocks

Given a divergence in valuations, stock investors should be discerning shoppers in the consumer sector.

Jason Stipp: I'm Jason Stipp for Morningstar.

As the consumer takes the center stage in the economic recovery, investors might be sniffing around the consumer sector looking for some investment opportunities, but it pays to be picky.

Here to tell us why is, Morningstar's Paul Larson. He is an equity strategist and editor of Morningstar StockInvestor newsletter. Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: So, you mentioned to me before that the market has enjoyed a pretty nice run here over the last few months, so it really is important to dig underneath the surface on any investments that you might be considering right now. You have some examples of some divergence of valuations in the consumer sector. Let's start on the overvalued side. You picked out a name that's looking pretty pricey right now. Tell us the story behind that?

Larson: The company that's looking a lot overvalued right now is Estée Lauder, ticker EL, and this is a women's consumer products company, making and selling make-up and shampoos, and other creams and lotions and such. This is a narrow moat company. It's a fairly high-quality company, relatively stable company. I can't say there is anything terribly wrong with the underlying business, but when you look at the underlying valuation, I think the stock is looking quite rich today.

Stipp: So, what's behind that? It has a narrow moat. It looks like a good business. You expect it would have a decent valuation, maybe a premium to some other consumer products companies, but it's beyond that. Why have investors bid up this company?

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