Recession Is a Blessing For These Six Stocks

With Americans slashing spending every which way they can, a somewhat eclectic group of companies is delivering surprisingly steady profits even in the midst of the worst recession since the 1930s. Call them beneficiaries of the frugalpalooza economy.

Consumers are eating in, holding on to their cars longer and cutting back on entertainment. That's a blessing for companies that make pasta, sell replacement auto parts and let you stay home and watch a movie (no baby sitter needed). It's great for discount retailers, too. And with the economy likely to remain mired in recession for most of the rest of the year, stocks of those companies that help consumers rein in costs may still have room to run.

Netflix (symbol NFLX) is an example of a business that is profiting from our disaffection with conspicuous consumption. Netflix, which mails DVDs to your home and delivers movies over the Internet via its Roku device, has seen its market share jump from less than 6% in 2003 to 18% in 2008, says Ron Rowland, founder of AllStarInvestor.com, a Web-based investment newsletter. Its formula? Convenience and low price. Memberships start at a loyalty-inspiring $4.99 a month.

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From late October through April 9, the stock surged 62%, to $47. Still, Rowland thinks Netflix can go higher. "It's got plenty of upside potential because it fits into the whole theme of people cutting back on extravagances," says Rowland, who's dubbed a section on his InvestWithAnEdge.com Web site "Frugalpalooza."

Consumers are also eating in more often. So companies that sell pasta and other packaged foods, such as American Italian Pasta (AIPC) and General Mills (GIS), stand to benefit from the national belt-tightening. Shares of American Italian Pasta -- which makes brand names, such as Mueller's, as well as private-label products -- have skyrocketed 680%, to $34, from March 2008 through April 9 of this year. The stock of General Mills, which makes everything from Cheerios to Betty Crocker cake mixes, has been less stellar. At $51, it's fallen 26% from its September 2008 high. Stephen Biggar, global director of equity research at Standard & Poor's, says he thinks both stocks can advance. "The new chic of staying home will continue until we get a good employment number," he says.

When frugalistas do leave the house, they hunt for bargains. That's helped discounters such as Wal-Mart Stores (WMT), one of only two stocks in the Dow Jones industrial average that rose last year. A less-well-known beneficiary has been Family Dollar Stores (FDO). Family Dollar has become popular among the middle-income set, thanks to the economic slowdown and an expanded line of merchandise, including food. Unlike many other retailers, which are either cutting back or going out of business, Family Dollar is expanding. From 2000 through 2008, it nearly doubled its store count, from 3,700 to more than 6,600. In its 2009 fiscal year, which ends in August, it expects to open 200 more stores. Over the past year, the stock, recently $34, surged 86%.

Parts plays. Car sales have fallen off a cliff. Instead of buying new vehicles, consumers are fixing up the ones in their driveways. That's helped the stocks of companies that sell car parts to do-it-yourselfers, such as Advance Auto Parts (AAP) and O'Reilly Automotive (ORLY). Advance Auto is attractive because it focuses on commercial-parts distribution, the faster-growing, more-profitable side of the business. O'Reilly, meanwhile, is benefiting from its acquisition of CSK Auto last July. The purchase, which nearly doubled the size of the firm, gave O'Reilly a West Coast presence. Since last October, shares of O'Reilly have jumped 82%, to $38, and those of Advance Auto have climbed 67%, to $42.

The dramatic slowdown in new-car purchases gives parts retailers a tail wind that will last 12 to 18 months, says Anthony Cristello, an analyst at BB&T Capital Markets. With money tight and consumers less able to tap home equity, new-car sales in the U.S. are likely to remain depressed. Today's dominant mind-set, he says, is "What do I need today to get by?" That's a sentiment that resonates across the nation.