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(Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
(Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

TheStreet.com

Goldman's 11 best U.S. consumer stocks for 2011 Add to ...

In an accelerating economic recovery, consumer-cyclical stocks tend to outperform. Goldman Sachs ranks the following 11 consumer-related equities "buy" and has several on its Conviction Buy List. They are expected to rise at least 10 per cent and as much as 41 per cent. Below, the stocks are ordered by predicted upside, from plenty to most.

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11. Viacom is an entertainment company, with television and film-studio subsidiaries.

Its stock has risen 43 per cent in the past year, but analysts are still optimistic about the equity's trajectory. Of those covering Viacom's B shares, two thirds rate them "buy" and one third ranks them "hold." Goldman's $46 target implies 10 per cent of upside in the next 12 months. Deutsche Bank is more bullish, forecasting an advance of 25 per cent to $52. In Goldman's latest research note, it stressed the upside potential resulting from a share buyback acceleration and dividend boosts in 2011 and 2012. Goldman previously expected $1.3-billion of buybacks each year, in 2011 and 2012. Viacom is guiding for $1.8-billion of buybacks in 2011 and $2.3-billion in 2012.

10. Staples sells office supplies and furniture through its retail stores and on the Web.

During the past three years, Staples has grown revenue 8.3 per cent annually, on average. Fiscal third-quarter net income increased 7.1 per cent to $289-million and earnings per share stretched 8.1 per cent to 40 cents. The operating margin widened from 7.4 per cent to 8 per cent. Staples will announce fiscal fourth-quarter results on March 3. Its stock is up 9 per cent in three months.

Of researchers covering Staples, 15, or 71 per cent, advise purchasing its shares, five recommend holding and one suggests selling them. Credit Suisse offers the highest 12-month target, at $29, implying 30 per cent of upside. Goldman's $26 target is consistent with a 16 per cent rise. The bank believes that earnings growth bottomed during the third quarter and Staples is due for double-digit earnings per share growth on a share buyback. The bank cites the "tepid employment recovery, slow small business spending trends and secular stagnation in paper and ink consumption" as headwinds to the company that are already priced into its stock. Outperformance or material improvement on any of these fronts will cause investors to pay a higher multiple for Staples, according to Goldman.

9. Nike was removed from Goldman's Conviction Buy List on Jan. 3, but retained its "buy" rating. Goldman still believes that Nike's story is compelling, but is now overly-appreciated by investors. Nike is one of the world's most recognizable brands in footwear, sportswear and apparel.

It has grown sales and earnings per share 4.6 per cent and 7.2 per cent annually, on average, over a three-year period. The stock has risen 29 per cent in the past 12 months, but it now costs 16-times forward earnings and 16-times cash flow, only modest apparel peer group discounts.

Goldman's $95 target suggests another 16 per cent of upside in Nike's shares, which are generally favoured by analysts. Currently, 14 researchers rate them "buy" and six rate them "hold." Nike receives no "sell" ratings. Both Credit Suisse and Barclays are predicting an advance of 21 per cent to $100. Goldman sees multiple sales drivers over the next 12 months, including an accelerating product cycle and exposure to burgeoning international markets, with nearly 50 per cent of sales coming from outside of the U.S. Furthermore, Nike is more insulated from cotton, which is on a run, than many of its competitors and it has a diverse sourcing base, which should help profit margins remain afloat.

8. Starwood Hotels & Resorts owns and operates hotel properties under the St. Regis, W, Westin, Four Points and Sheraton names. Goldman is "bullish on the current hotel cycle" and calls Starwood its "top pick across the coverage space" for an upward cycle that will be "strong and long."

Starwood delivered a third-quarter GAAP loss of $6-million, or three cents a share, but its stock has risen an eye-catching 77 per cent in the past 12 months. Given the outperformance, analysts offer a middling view, with 17, or 58 per cent, rating it "buy" and 12 ranking it "hold."

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