If you are bullish on the consumer economy, there are several stocks that you should consider. I recommend buying across multiple categories ranging from toys to gaming stocks. Below, I review two leaders in these respective fields and provide my take on why you should be optimistic about their futures.
The innovative toymaker
If nothing else, the company is a strong defensive investment off of a recovering economy. Dividends have been boosted by double-digits — continuing the company’s rich tradition of returning free cash flow to shareholders. This comes on top of the company repurchasing 2.3 million common shares for the fiscal year.
What attracts to me Mattel, Inc. (NASDAQ:MAT) is it’s simplicity. It: (1) develops cash cows; (2) innovates; and (3) returns free cash flow to shareholders. It’s a safe plan that has sent shares to their 52-week high and up 53% from the lows while paying a 3.2% dividend yield. With analysts expecting 9.4% annual EPS growth over the next five years, I believe the stock will outperform despite its stability.
For stronger upside, I recommend investing in LeapFrog Enterprises, Inc. (NYSE:LF). The stock is dirt cheap at slightly more than 7 times past earnings, and it is on a sharp growth curve. Analysts forecast 17.5% annual EPS growth over the next five years. With no debt and a current ratio of 6 times, LeapFrog is an ideal takeover target. As the leader in educational electronic toys, it can add considerable synergistic value to a suitor.
The always-growing game maker
Since its founding, Activision Blizzard, Inc. (NASDAQ:ATVI) has made several acquisitions in an attempt to improve its product portfolio and increase global presence. In 2011, the company acquired Beachhead Studios to further efforts in development of Call of Duty games — a strategy that has been paying dividends in light of how they have won back-to-back awards.
Some of the games we expect to see from Activision Blizzard, Inc. (NASDAQ:ATVI) in 2013 include The Walking Dead, Destiny and Deadpool.
A high bar, however, has been set for these titles. In the fourth quarter, Activision Blizzard, Inc. (NASDAQ:ATVI) yet again exceeded consensus. The good results were propelled by high sales of the Skylanders toy game and Call of Duty Black Ops 2 during the holidays. For the 2012 fiscal year, the company recorded net revenue of $4.86 billion on a GAAP scale compared to $4.76 billion on a similar scale in 2011.
Going forward, I see the company as an undervalued grower. It trades reasonably at a respective 13.3 times past and 14.1 times forward earnings, with a dividend yield of 1.3%. Analysts forecast a 9% annual EPS growth rate over the next five years, which I think is actually low in light of it being more than 650 basis points below the rate that was achieved in the past five years. With a free-cash-flow yield of 7.2%, no long-term debt, and a beta of 0.55, Activision Blizzard, Inc. (NASDAQ:ATVI) is a safe investment with plenty of upside potential.
Conclusion
With Microsoft and PlayStation getting ready to launch their new consoles, all eyes will be on the video-game market. Investing in a company as consistent as Activision Blizzard, Inc. (NASDAQ:ATVI) provides exposure to the market while hedging against the uncertainty of a new launch. By contrast, Mattel, Inc. (NASDAQ:MAT) — while still an incredibly safe investment — is more of a play on innovation.
The article Buy These Consumer Stocks originally appeared on Fool.com and is written by David Gould.
David Gould has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard (NASDAQ:ATVI), LeapFrog Enterprises (NYSE:LF), and Mattel. The Motley Fool owns shares of Activision Blizzard and LeapFrog Enterprises. David is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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