4 Stocks Ready for an Economic Rebound

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.

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.

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.