Dick's Sporting Goods

FOR MONTHS FELIX URENA had been trying to hold the line on spending. Like most Americans, the 35-year-old medical buyer from Queens, N.Y., had seen his income chipped away by higher gas, food and utility bills. The most frustrating part was holding off on a new computer for his daughter even though he knew she could use it when she enters sixth grade this fall. Then Uncle Sam came along with a $600 rebate check, part of the federal government's attempt to keep the economy from sinking into a serious recession. Urena did some math, rechecked his finances and bought a laptop computer for his daughter. Two weeks later he bought another laptop, this one for his girlfriend. "She went nuts," he says.

Consider Urena stimulated. It may not seem like much in these hard times, but the government's efforts to inject funds into the economy are going to benefit some savvy companies out there even more so if an added dose of stimulus is on its way. Indeed, just months after the government handed out $110 billion in rebate checks, there was already talk in Congress about dishing out another rebate round to prod consumers. The Fed, meanwhile, has pitched in too, slashing the federal-funds interest rate from 5.25 percent to 2 percent over the past year. Find the right companies that will benefit from all this recharging, investment pros say, and grab them now at bargain prices. "It will take a few months, maybe even a year, but you'll get paid off," says Jim Paulsen, chief investment strategist at Wells Capital Management.

Of course, it's hard for all but the bravest to think nice thoughts about the U.S. economy when sky-high oil prices slice into consumer spending, Fannie Mae and Freddie Mac are making headlines, and consumer confidence is at its lowest point in nearly three decades. And the bad news could continue if inflation accelerates and the credit crunch extends well into 2009. But optimists can look at U.S. economic history for hope. Since World War II, every time the Federal Reserve has significantly cut interest rates, the economy has grown faster within about 18 months, says Richard Kelley, senior economist for TD Bank Financial Group. The biggest example: Facing a brutal recession in mid-1982, the Federal Reserve cut interest rates by 3.5 percentage points, while the federal government spent hundreds of millions of dollars to stimulate the economy. Within a year unemployment had fallen, corporate profits had risen, and the stock market began a remarkable 18-year boom.

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While few experts expect that kind of performance this time around, even a slow economic recovery would benefit retailers, restaurants, construction firms, hotels and industrial manufacturers. Analysts say the economy could be further stimulated if the price of oil falls significantly, which isn't out of the question now that Americans have started cutting back on driving. Some analysts also suspect oil demand could fall further if China puts the brakes on its economy after the Olympics, and other nations reduce energy subsidies and make their citizens pay market prices for fuel.

To find stocks that can benefit from a recharged economy, we looked for sectors sensitive to consumer spending. Then we wanted to see companies in those groups that keep a lid on costs and have strong long-term prospects, even if their profits had taken a recent hit. We didn't pick the cheapest of stocks; in many cases, those had problems not even a revived economy could fix. But we still found four firms that should capitalize on a rebound.

Dick's Sporting Goods (

Americans love sports, and perhaps even more so when almost everything else seems to be going wrong. So despite the slowing economy, Dick's Sporting Goods plans to open 44 more Dick's stores this year, selling basketballs, gym shoes and other sports equipment. But investors have called a foul on Dick's stock lately, sending it down 36 percent since the beginning of the year, because sales at stores open at least 12 months fell more than 3 percent in the company's first quarter. For 2008 the Pittsburgh-based company expects same-store sales to be down as much as 5 percent.

The good news, says Bob Simonson, a retailing analyst for William Blair, is that Dick's is positioned to resume its steady sales growth over the next several years. For starters, the chain is often ahead of its competitors in spotting trends and controlling inventory. That means Dick's can sell hot products faster and at higher profits than the competition. It also has a strong collection of private brands and is partnering with labels like Nike, Adidas and Reebok to create even more. Merchandising is Dick's "strongest suit," says Oppenheimer analyst Vivian Ma. It also has a strong record of expansion, both with acquisitions and new stores. The company says it has the potential to grow to 800 Dick's stores, more than double its current count.

As the largest publicly traded sporting-goods retailer in the country, Dick's could be one of the earliest beneficiaries of an economic rebound. Sales of sporting goods were essentially flat from 2000 to 2001, but it didn't take long once the 2001 recession ended for consumers to start buying more athletic apparel and baseball bats. Spending on sporting goods increased by more than 7 percent between 2002 and 2004, according to the National Sporting Goods Association. Dick's fared much better the company's sales increased 66 percent over the same period, and its profits rose 80 percent.

Analysts expect Dick's net income to fall to $1.26 a share this year, from $1.34 last year, breaking its streak of seven straight years of higher profits. But they expect that drop to be just a blip and project` earnings-per-share growth of 18 percent a year over the next five years. And with the stock trading at 14 times this year's depressed profit, some investors think the recent decline is more like a free throw a chance to buy a growing company at a value price.

Marriott, Kennametal, CKE Restaurants

In some ways, the stock of Marriott International is like a frequent traveler who always wants the same room: predictable. When the Federal Reserve cuts interest rates, as it did in 1998, 2001 and the past year, the shares get crushed. That's not surprising, since the Fed usually takes action about the time the economy is faltering. What's more interesting for investors is that within a year of the rate cuts, Marriott shares rebounded and ended up higher than they had been before their decline. With Marriott shares selling at nearly half of their 52-week high, some investors are counting on the lower rates to work again this time around.

Marriott, with some 3,000 hotels under names including Ritz-Carlton, Renaissance, Courtyard and Fairfield Inn, isn't about to escape the travel slowdown. It says its U.S. business likely will be flat or decline slightly the rest of the year. But the recent tumble means the stock trades at 15 times 2008's expected profits of $1.79, well below its five-year average of 21. "Buying a high-quality franchise like Marriott at close to a low multiple has been a pretty good strategy," says Richard Clattenburg, hotel analyst for T. Rowe Price. And though this year's earnings are expected to fall, the firm managed to generate $107 million in free cash in 2007. It put some of that to work by buying back more stock (it has already repurchased $3.5 billion worth since 2006) and paying down some debt.

The Bethesda, Md., company has something else going for it: Despite being a household name and having worldwide reach, it actually owns just a handful of hotels; the majority are franchised or operated for others. Marriott employees take care of details such as making sure the sheets get folded and confirming your room reservation in return for a management fee from the owner a fee that doesn't change much whether the economy is soaring or reeling. What does fluctuate are the incentive fees that hotel owners pay based on how efficiently or profitably Marriott runs the hotels. Those fees, which made up 19 percent of Marriott's total revenue last year, have declined recently but should resume their growth as the economy recovers.

Kennametal (

No matter how bad the current economic malaise is, Kennametal has been through worse. After all, the industrial company was started during the Great Depression. It thrived then because it had a technological breakthrough creating a new alloy that cut through steel more effectively. And that sort of innovation has allowed Kennametal to do well now as one of the world's largest makers of metal-cutting tools; more than 40 percent of the Latrobe, Pa.-based company's revenue comes from products less than five years old.

But innovative or not, in 2008 investors lumped Kennametal in with other U.S. industrial firms, sending its shares down 15 percent. Some analysts say that decline has made the stock extremely cheap 12 times this year's expected profits of $2.75 a share. "It's a good price to get a well-managed, diversified industrial company," says Walter Liptak, an analyst for Barrington Research.

Kennametal's products are used by manufacturers such as makers of road graders, farm tractors, aircraft engines and armor-piercing ammunition. And not just in the U.S. nearly half of the company's $2.4 billion in sales comes from outside North America. Since the early 2000s, Kennametal has been buying tooling and metal-cutting firms around the world and making them more efficient. The foreign sales help shield the company from the domestic downturn. And at least so far, the economic problems in the U.S. haven't hurt the bottom line. In the first nine months of the company's current fiscal year, operating profits rose 15 percent from a year earlier on a 30 percent increase in sales. Meanwhile, the company is using its cash flow for more acquisitions, stock buybacks and dividends.

Kennametal isn't expecting much improvement from the U.S. economy this year, says CEO Carlos Cardoso. But with the amount of money thrown into the system, he says "2009 will be better than 2008." Cardoso hopes that's when American companies, such as aerospace firms, will buy more equipment. In the meantime, he says, Kennametal, which has 14,000 workers worldwide, is trying to stay lean by trimming some administrative costs, closing some U.S. factories, and adding jobs in growing markets such as China and Brazil.

CKE Restaurants (

Fried. Roasted. Filleted. Any of those words effectively describes the performance of many restaurant stocks over the past year as the economy faltered. Indeed, eateries have seen profits squeezed by higher food prices and soaring gas prices, which have led more people to eat at home. But Carpinteria, Calif.-based CKE Restaurants has managed to buck the trend. The holding company has more than 3,000 Hardee's and Carl's Jr. locations. Thanks to innovative and apparently tempting offerings such as the Carl's Jr. Chili Cheese Burger and Cap'n Crunch milkshake, CKE's same-store sales have risen 2 percent so far this fiscal year. That's better than many competitors' and beats CKE's 1.3 percent growth over the same period in 2007. And as a group, restaurant stocks are often among the earliest beneficiaries of an economic recovery. In 2003, as the economy rebounded, restaurant stocks were up 41 percent, followed by a 29 percent gain in 2004.

However, like the Hardee's Prime Rib Thickburger, CKE's stock isn't for the faint of heart. The shares are down by more than one-third over the past year. Rapid expansion has left CKE with $370 million in debt a hefty 70 percent of its total capital. The company recently told analysts it would scale back expansion plans and use some profits to pay down debt. And while profit margins were hurt last year by higher packaging and food prices, analysts say margins have stabilized as the company raised prices; a decline in wheat prices also helped offset increases in other costs. Analyst Tony Brenner of Roth Capital Partners says CKE's profits should grow quickly when food and energy costs stop rising, though he adds that might not happen until later this year. Meanwhile, he expects customers to keep wolfing down those burgers and shakes. After years of uneven profits, analysts are looking for an average profit increase of 17 percent a year over the next five years.