6 Stocks Overlooked by Wall Street

Booze, cigarettes, breakfast cereal and bleach tend to attract investor attention in markets like this. In a grim economy, sales of such goods are likely to hold up better than those of, say, pricey laptops and restaurant meals. But stock valuation matters, too. Over the past year, Clorox (CLX) has lost a mere 5% to the S&P 500 index's 40%. General Mills (GIS), which I last recommended in February, has gained. Both companies now have price/earnings ratios well higher than those of the broad market, despite operating in slow-growth businesses. Their once-alluring dividend yields are now common. Both companies remain strong, but I can't help but think that the defensive names don't look as defensive as they should.

J.M. Smucker (SJM) sells goods with similarly stable demand: peanut butter, jam, shortening, oil and so on. It doesn't sell coffee, but will sell plenty of it soon, thanks to an all-stock merger planned with Procter & Gamble's (PG) Folgers unit. Smucker has previously bought and improved the profitability of other P&G brands like Jif and Crisco, but this is a much larger meal. After the deal, the company should be nearly double its current size. P&G shareholders will own just more than half of it. Smucker shareholders will vote on the deal on Oct. 16.

Smucker trades cheaper than most of its grocery aisle peers, at less than 13 times earnings. The dividend yield stands now at 2.7% — acceptable, if not exciting. Shares have consistently outperformed the broad market since their 1959 debut. Over the past decade, management has grown sales by a compounded average of 16% a year, and earnings by 18%. Mostly that has come from acquisitions; Smucker has bought 12 brands in six years.

Don't expect that pace of growth to continue. But the company has the cash flow and balance sheet to continue shopping for smaller brands. Management aims to grow the sales of its existing businesses by 3% to 4% a year and add another two or three percentage points from acquisitions. With share repurchases and debt repayment that could translate to 8% earnings growth. Expect dividends to increase at about the same pace, since the company likes to maintain a payout level of 40% of earnings.

One other potential bright spot: ingredient deflation. The run-up to $150-a-barrel oil made just about everything Smucker sells more expensive to produce. Crude's recent slide below $85, once it works its way through the manufacturing chain, might bolster margins. Perhaps for that reason, and because Smucker says the Folgers deal will add to earnings right away, Wall Street expects adjusted earnings per share to increase 11% this year — pretty peppy for jam and canned coffee.

Smucker turned up recently on a search for companies with limited coverage on Wall Street, ample free cash flow, respectable dividends and recent sales growth. Have a look if you like at five other companies that made the cut. Run your own search anytime using SmartMoney's stock screener and the full list of criteria.

Unheard Of Screen Recipe
Coverage by 2 to 5 analysts
Price/free-cash-flow ratio below 20
Dividend yield greater than 2%
Past-quarter sales growth positive
Trailing 12-month sales greater than $200 million
Average daily trading volume greater than 100,000 shares