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5 Big Consumer Stocks to Buy on the Cheap

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Bargain-hunting investors take note: there are some big discounts floating around in consumer stocks.

Consumer stocks have been heating up over the last six months, gaining steam as they eke out positive performance more quickly than the venerable S&P 500. Because consumer names (especially consumer nondurables) tend to lead the early stages of bull markets, the fact that these names are heating up bodes well for investors in 2013. And with earnings season under full steam starting this week, there's an extra catalyst for shares to move higher — if they can best the numbers investors are hoping for, that is.

But while all consumer names stand to benefit from the rising tide, some look ready to benefit more than others.

That's because some of the biggest consumer stocks on the market right now are trading for pretty significant discounts compared to the rest of their industries. That's presenting a big opportunity for investors willing to put on their buying hats this month.

With technicals for the consumer stocks sector starting to show overall strength again, this bargain bin is comprised of the other half of the coin — fundamental valuation metrics that come in cheaper than their sector averages. In particular, we're focusing on firms who are earning more profits, bigger cash flows, and sport better book values than their sector averages.

Here's everything you need to know about five consumer stock bargains worth buying in 2013.

McDonald's

Up first is fast food giant McDonald's. This defensive consumer stock was under fire in 2012, dropping by around 10 percent over the last 12 months — so it should come as no huge surprise that the Golden Arches are looking cheap right now. In fact, McDonald's currently trades for a 31 percent earnings discount to the rest of the restaurant industry, and nearly a 20-percent cash flow production discount. Those metrics make McDonald's look like a considerable bargain as we dive into 2013's trading.

McDonald's is the standard bearer in the fast food business, with more than 33,500 locations spread across 119 countries. The firm was one of just a handful of blue chips that actually managed to increase its business — and its share price — back in 2008. But that defensive posturing is exactly what's causing investors to eschew McDonald's in favor of higher-end food names now that consumer discretionary spending is heating up again. The firm is responding by hiking its premium offerings here at home, and by reaching out to burgeoning middle class populations in emerging markets (where McDonald's stores are seen as a higher-end dining option).

While many investors don't realize it, McDonald's is actually part restaurant chain and part REIT — the firm owns much of the land underneath franchised store locations, generating bigger royalty streams from each location than rival quick service restaurant chains. A 3.4 percent dividend yield completes the picture for McDonald's financial health. The combination of cash generation, shareholder returns, and a discounted share price makes this consumer stock a good choice for 2013. Keep an eye on fourth quarter earnings slated for January 23.

Procter & Gamble

Another blue chip giant is personal care product maker Procter & Gamble, the $187 billion firm behind household name brands such as Tide, Charmin, and Cover Girl. Procter's size guarantees that the firm has no shortage of eyes on it — that's why it may come as such a surprise that shares are trading at a big discount to the rest of the household products industry right now; as I write, Procter sports a 23-percent discount to P/E versus the rest of the industry.

Procter's brand portfolio is mammoth. In all, the firm lays claim to 25 individual brands that bring home more than $1 billion in annual revenues, providing impressive diversification on its income statement. As with McDonald's, P&G's massive scale presents some challenges, so the firm is focusing on cutting costs here at home while it introduces new products to consumers in emerging markets. The former should help to expand P&G's already stout margins while keeping the top line widening on the income statement too.

The balance sheet over at P&G is everything you'd expect from a firm this big. While there is considerable leverage at play — around $32 billion worth — a hefty cash position and ample cash generation abilities help to ensure that P&G continues to earn excellent ratings (and borrowing costs) for its credit. Procter is another dividend name, with a 3.3-percent dividend yield at current price levels. Even though Procter's discount isn't huge, with earnings slated for January 25, more eyes will be coming onto this big stock very soon.

Clorox

Household product peer Clorox is another stock that's looking discounted compared to the rest of the industry. Even though Clorox isn't even close to P&G's scale, the $10 billion firm is hardly a small player in the personal and household goods category — the firm owns a stable of brands that includes Glad, Hidden Valley and Brita, in addition to the firm's household-name bleach products. Even so, Clorox currently trades for nearly a 30 percent P/E discount, and a 15 percent relative discount on cash flows.

As with P&G, Clorox has a diversified income statement, with sales spread out across its brand portfolio. But Clorox does have outsized concentration geographically, with more than 80 percent of sales coming from the U.S. — with such an unsaturated market for CLX's products in emerging countries, this stock has a big opportunity for growth right now. Cost inflation has been a concern for a number of household goods makers, but Clorox has shown that its more than capable of controlling costs of goods sold: this stock's net margins are consistently in the double digits.

Clorox has a balance sheet that's on par with P&G's, just on a smaller scale. Clorox current has just shy of $700 million in cash, offsetting a $3 billion debt load. That's an easily manageable amount of leverage for the firm, even when a 3.4-percent dividend payout is factored into the equation. That makes this bargain a slightly higher-beta alternative to P&G because of its size. Clorox's earnings come in at the start of February.

J.M. Smucker Co.

Food stock J.M. Smucker Co. may be best known for its namesake jams, peanut butter, and jelly brand — but the firm also owns names like Folgers, Dunkin' Donuts coffee, Jif, and Crisco. The firm is one of the most bargain-priced consumer stocks on our list, trading for a 30-percent discount to P/E and a massive 42 percent discount to its cash flow generation.

Smucker dramatically boosted its scale when it acquired Folgers in 2008, essentially doubling the size of SJM's total business. The move was risky at the time because of market conditions here at home and the huge price tag that the firm paid for the coffee brand, but so far it's paid off in spades. SJM's coffee business earns the biggest operating margins of all of the firm's units, and the firm's overall margins have edged higher as a result. Management's ability to make smart acquisitions comes contrary to what most firms have achieved in the last few years — and investors should appreciate that.

Because Smucker's brands are very popular with consumers, the firm enjoys extra leverage when negotiating with end customers on the retail side. That translates into a bigger yield for shareholders — the firm tries to target around a 40-percent payout rate that presently means a 2.33-percent dividend yield. As long as management can keep debt in check, the discount on SJM right now isn't likely to last.

Wal-Mart Stores

Last, but certainly not least, is Wal-Mart. The world's biggest retailer is just now coming off the heels of a strong year, after rallying more than 16 percent in the last 12 months. But that doesn't mean that WMT's shares are expensive right now — quite the contrary. Wal-Mart currently trades for a huge 41 percent P/E discount compared to the rest of the retail industry, and a 50 percent cash flow discount.

With more than 10,000 stores worldwide, the retailer sells to more than 200 million customers each week in total. Wal-Mart's retail success is all based on price. Because of Wal-Mart's giant scale, the firm can compete on selling prices in a way that other retailers can't — so it's willing to cede margins in favor of sales volume; nearly $450 billion in annual revenues speaks to that. Wal-Mart also owns pricing power in a way that most other retail stores can only dream of. Because Wal-Mart is many suppliers' biggest customer, they have to keep their own prices extremely low to keep the relationship alive.

A strong balance sheet rounds out the picture for Wal-Mart. The firm sports $8.6 billion in cash, and a $57 billion debt load that includes lease obligations. That amount of leverage is reasonable for a big retail name like Wal-Mart, and it's easily covered by the firm's hefty cash generation capabilities. Even though most investors don't expect to find a bargain in a behemoth consumer stock like Wal-Mart, it's there right now.

—By Street.com Contributor Jonas Elmerraji

Additional News: McDonald's Tests Chicken Wings

Additional Views: Talking Numbers: Buy McDonald's or Yum?

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