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Big Investors Bet on Sloth-Like Consumers

ByFrank Byrt,

BOSTON (TheStreet) -- You can't underestimate lazy people's desire to take more of the "work" out of living. Products such as $450 self-directed vacuum cleaners and $35 electric-powered jar openers are truly for the slothful among us. But the makers of such devices are on a list of companies that have bright futures as long as the economy continues to recover and consumers loosen the purse strings. Their decision to spend defines the sector -- consumer discretionary. Essentially, you don't need those products to live. It's a broad group that includes everything from car companies to restaurants and retailers. That stock-market sector had a great run in 2010, returning 27%, including 13% in the fourth quarter, Morningstar said. The broader S&P 500 Index returned 15%. A bet on consumer-discretionary stocks now is essentially a bet the economy will continue to recover this year. If that's the case, it's almost certain there's pent-up demand for consumer goods and services that make life easier. But over the past few weeks, that thesis may have been threatened. Consumer confidence slid in December after reaching a three-year high in November, as more people rated current economic conditions and the state of their personal finances as poor, according to Discover U.S. Spending Monitor. Morningstar analyst Peter Wahlstrom writes that "while pockets of softness still exist, we expect another year of mid-single-digit (earnings) growth among consumer cyclical firms in 2011 as the U.S. economy continues its slow recovery." The five companies cited on the following pages have good ratings from analysts. Several are diverse, and the performance of any one product isn't likely to influence the company's overall performance. iRobot is known for its self-directed Roomba vacuuming robot, which takes the time and tedium out of pushing a vacuum around. A basic model sells for around $450. The consumer-product line also includes: Scooba floor-washing robots, Verro pool-cleaning robots, Looj gutter-cleaning robots and programmable robots for the creative. It's likely that the three Massachusetts Institute of Technology researchers who founded the company didn't create it solely to make vacuum cleaners obsolete. Rather, their robots' ultimate purpose may be as soldiers. iRobot also makes the combat-tested 510 PackBot line of small, unmanned ground robots, as well as a small, unmanned vehicle for bomb disposal and reconnaissance. Those critters may soon get as much use as the airborne drones now in the Middle East conflict. It also has a civilian version, the "210 Negotiator," for use by police in hostage situations. Company sales for 2010 are seen at $398 million and growing 13.5% in 2011 to $452 million. Earnings are expected to be 84 cents per share in 2010, rising 8% to 91 cents in 2011. The company is in a strong financial position. At the end of the third quarter, iRobot had no debt and about $4 per share in cash. The company gets a ringing endorsement from Fidelity as it owns 15% of the company's shares. The Bedford, Mass.-firm, not far from Cambridge-based MIT, has a $464 million market value. Its shares returned 55% over the past three years, including 41% in 2010. Analysts give iRobot one "strong buy" rating, two "buy" rankings and seven "hold" ratings, according to Thomson Reuters.

La-Z-Boy is the maker of the recliner that's the throne of the average American male. It also makes and sells sofas, couches and other forms of living-room furniture at its plant in Michigan. La-Z-Boy is one of the most recognized brands in the furniture industry, and has a loyal and aging following that will seek to replace La-Z-Boy chairs and couches on a regular basis. It has also increased sales to health-care centers and assisted-living centers. The company owns 68 La-Z-Boy Furniture Galleries stores as well. Earnings at the small ($465 market capitalization) company are cyclical, along with others in the furniture industry. Its results are tied closely to the economy and home sales. Analysts estimate the company will post earnings of 33 cents per share in 2011 and that will grow by 124% in 2012 to 74 cents per share. Shares are more up-and-down than its recliners, falling 71% in 2008, gaining 339% in 2009, then losing 5% in 2010. Analysts give its shares two "buy" and four "hold" ratings, according to Standard & Poor's. Franklin Advisers funds own 7% of La-Z-Boy. Home Shopping Network's basic premise is: Why go to the mall when you can shop from the couch? As painful as it may be for some people to watch ever-smiling hosts hawk "portable" fireplaces and such, there's a definite growth trend toward buying without leaving the home, whether it's over the Internet or via the phone, after witnessing a product demonstration on TV. And Home Shopping programs are on 24-7. But that's only a small part of the HSN story, as the company defines itself as "a multichannel interactive retailer" made up of two business units: HSN television network, which broadcasts live home-shopping programming into over 80 million homes via cable and satellite; and Cornerstone, which designs and distributes catalogs and manages online Web sites for retailers including Frontgate, TravelSmith and Smith+Noble. As an example of how rapidly retail is changing, last month the company launched an Apple iPad application that will offer HSN video live and 15 channels of archived video for those who shop over that medium. HSN already has smartphone applications that provide a means for "customers to create their own personalized shopping experience." In the third quarter, the company had net income of $15 million on sales of $708 million. Analysts expect 2010 earnings of $1.67 per share, rising to $2.02 in 2011. Shares returned 178% in 2009 and 52% in 2010, bringing its market capitalization to $1.8 billion. Analysts give it four "buy" ratings and one "hold," according to FactSet. The investment firm Lord Abbett owned 13% of its shares as of Sept. 30.
Stanley Black & Decker makes a line of leaf blowers (replacing the rake and broom), and "Lids Off," a $30 electronic device that opens jars (replacing husbands). These leaders of the U.S. tool-making industry, struggling with competition from tool makers from Asia, are seeking rejuvenation via the $4.5 billion merger of Stanley Tools and Black & Decker early last year. The new company is a diversified seller of hand and power tools, electronic security systems and consumer electronics used by professionals as well as do-it-yourselfers. It's also heading in a new direction with the initiation of Stanley Healthcare Solutions, a maker of mobile health-office workstations. For fiscal 2010, analysts estimate earnings of $3.70 per share and growth of 27% in 2011 to $4.70. Stanley shares returned 55% in 2009 and 32% in 2010. Fidelity had an 8% stake, the largest of any investor, as of Sept. 30, followed by Wellington Management, at 5.6%. Analysts give it mostly positive ratings, including four "buy" ratings, three "outperform" rankings and three "hold" ratings, according to FactSet. Koninklijke Philips Electronics' line of powered toothbrushes promises to take all the challenge out brushing one's teeth. Its Sonicare IntelliClean toothbrush system ($100) incorporates a high-speed toothbrush, coupled with a liquid toothpaste dispenser and a timer, so there's no cutting short this arduous task, such that teeth get cleaned "at the push of a button." Philips is a huge ($28 billion market capitalization) conglomerate with three primary product lines: lighting, health-care technology and consumer electronics. Consumer-electronics products make up about 37% of sales, and the other two divisions contribute the balance roughly equally. Given the varying cyclicality of their markets, the company's divisions often offset one another's performances, providing some stability to results. There is concern that the overhaul of the health-care system in the U.S. will hurt its health-care technology business, and lighting has suffered from the housing slump. But Philips' balance sheet is solid, with cash on hand about equal to long-term debt. Revenue for 2010 is estimated at $34 billion and earnings at $1.83 per share. Shares were up 52% in 2009 and 7% in 2010. Fidelity is the largest shareholder, with a 1% stake. Analysts are expecting a breakout year for its shares, as 20 give "buy" ratings, four "outperform," eight "hold" and two "underperform," according to FactSet. -- Written by Frank Byrt in Boston.