8 Stocks for Weathering Stormy Markets

Mom and Dad can wait out a slow economy in worn clothes, but Junior's lengthening limbs won't pause for GDP. That makes kids clothing a defensive business for stock investors. It's not entirely insulated. In a long slump, posh stores stand to lose sales to discounters, thrift shops and hand-me-downs.

A year ago, as retail sales began to soften, such was feared to become the fate of Gymboree (GYMB), once a parent-child play center, now a clothing chain for under-12s. Jeans for a knee-high boy there cost $20 on sale. Full-price, they're less than $17 at Old Navy, owned by Gap (GPS), and under $10 at Wal-Mart Stores (WMT). Between this time a year ago and early February, Gymboree shares plunged to $27 from $39. That seemed justified at the time; January sales at the company's longstanding stores came in flat year-over-year, while Wall Street's seers had expected 10% growth.

But the stock has since gained back what it lost and a smidgen more. Investors who bought a year ago are up 3% -- cause for celebration, considering the broad market has fallen 15% and the median clothing seller in our database has lost 12%. The recovery isn't quite owed to a surge in sales. Last quarter's same-store sales increased just 1%. Management reckons this quarter's will be flat or slightly down. Just the same, per-share profits are on pace to climb a handsome 20% during Gymboree's fiscal year, which ends Feb. 2, thanks in part to efficiency gains and store openings.

Let's not applaud too loudly for Gymboree stock. Ten-year investors have quadrupled their money, but shares still sit well below the October 2006 peak. Sales have grown nicely since then. Profits, too. The problem seems to be one of, in the parlance of analysts, saturation and price/earnings compression. Gymboree has more than 600 stores and is expected this year to top $1 billion in sales for the first time. In June Betty Chen, a retail analyst for Los Angeles investment bank Wedbush Morgan Securities, estimated that Gymboree as a chain had reached 96% of the size the market will hold vs., for example, 75% for rival Children's Place (PLCE).

As recently as 2005, Gymboree's stock price was treated like those aforementioned toddler pants -- a bit of slack was seen merely as room to grow into. Shares regularly went for 1.5 times the broad market's price/earnings ratio. Now the stock price seems fitted to, not just a grown company, but a shrinking one. At $39 shares fetch 12 times this year's earnings forecast. That's only about 0.8 times the market's P/E, which itself has come down in recent years. The stock is similarly discounted to peers: Children's Place and Tween Brands (TWB) go for 16 and 15 times earnings, respectively.

Perhaps Gymboree is undervalued. Its namesake chain might have outgrown investors' adoration, but the company has three others. There are 104 Gymboree Outlets, 101 Janie & Jack shops for babies of means and two dozen Crazy 8 stores, which seem, although I can't judge for certain, to cater to the burgeoning personalities of young school kids. (T-shirts bear messages like "I'm not listening" and "That's how I roll.") Wedbush Morgan's Chen calls Janie & Jack and Gymboree Outlet half and two-thirds "mature," respectively. Crazy 8 is a newborn. Aside from store openings, the company seems likely to boost sales through an ongoing push into husky sizes and to tweak profits using new payroll software at stores and by sourcing more clothes in countries with low labor costs. In a year's time management plans to turn more than 15 cents of each sales dollar into operating profit, up from 14.6 cents today -- already a doubling since 2005.

Gymboree turned up recently in a screen for companies with healthy sales and profit growth and modestly priced shares that have tended in recent years to mute sharp swings in the broad market -- something prized among cautious investors. Have a look at seven other screen survivors on the next page if you like, or create your own list using SmartMoney's stock screener.