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Consumer Investment Opportunities in Turbulent Markets

A flight to safety could present buying opportunities for several names.

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For some time, we've held the position that the macroeconomic recovery following the Great Recession of 2008-10 would be relatively slow and often volatile. Sure, unemployment rates have gradually improved within the most educated segments of the population, and consumer traffic has remained surprisingly strong, but anemic real wage growth, a stagnant housing market, elevated food and fuel costs, the end of QE2 in June 2011, and increasingly troubling credit markets in Europe have had us concerned that the market overshot the true pace of economic recovery for several months now. The median price/fair value for our collective consumer cyclical and consumer defensive coverage universe had hovered between 1.05 and 1.10 for much of the year, leading up to the market sell-off the past few weeks. The fallout from S&P's U.S. credit downgrade (to AA+ from AAA) and subsequent concerns over Europe's sovereign debt crisis drove the median price/fair value for our universe to around 0.90 as of Aug. 18 closing prices. Although our call for a drawn-out recovery among consumer companies spanning several years remains intact, we're bracing ourselves for what could be a bumpy remainder of the year.

We acknowledge the headline risk associated with more cautious consumer spending and austerity measures could persist throughout the remainder of the year (and possibly into next year), but we believe the market sell-off has presented investors with an opportunistic entry point for several best-in-class names. Here we identify several wide- or narrow-moat names that should offer investors some stability in a volatile market. Generally speaking, we like companies possessing a combination of economies of scale, pricing power in categories where perceived differentiation matters, exposure to emerging markets (particularly China), resources to extend brand reach, and strong dividend growth potential. Below we summarize our top buying opportunities during turbulent markets.

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.