Four Stocks Peter Lynch Would Like

Here are my own four very personal substitution stocks. Use them to jump-start your own thinking about how substitution is changing the consumer sector -- and the lineup of winners and losers.

Claire's Stores

The largest retailer of teen-oriented fashion accessories in the world (items are typically priced at $2 to $20), Claire's Stores (CLE Quote) is a classic substitution play. When the economy gets tight and consumers look to pull in a little, previous economic slowdowns tell us that they're likely to substitute small, feel-good buys for more expensive, big-ticket purchases.

Wall Street projects that Claire's earnings per share will climb 17% in the fiscal year that ends in January 2004 and 12% in fiscal 2005. If history follows form, the substitution effect should give those projections plenty of protection, even if the economy continues on its current slow-growth path. The stock now trades at just 14 times projected fiscal 2004 earnings and at just 1.2 times trailing 12-month sales, a 10% discount to the price-to-sales ratio for the S&P 500 as a whole.

Ritchie Brothers Auctioneers

One strength of the idea of substitution is that it takes account of our desire to shop. In the early 21st century, shopping is one of the major leisure time activities of the average U.S. consumer. But consumers aren't the only ones looking for value in this economy and willing to go outside traditional purchasing channels to do so. Ritchie Brothers Auctioneers (RBA Quote), based in Richmond, British Columbia, hits that same value sweet spot -- but for the corporate purchaser of agricultural, construction, forestry, mining and transportation equipment.

Wall Street projects the company's earnings per share will climb 20% this year and 9% in 2004. That latter number is likely to be low if the economy continues to grow slowly. In that environment, corporate buyers will look for ways to find equipment at a discount and a slow-growth economy will give Ritchie Brothers Auctioneers lots to sell. The stock trades at 19 times projected 2003 earnings per share.

GameStop

GameStop (GME Quote) is the new brand name for a computer and video-game retailer that combines the former Babbage's, FuncoLand and Software Etc. chains. What makes GameStop an interesting substitution play for me is its rank as the No. 1 seller of used games. Of the company's 1,200-plus stores, the 45% in malls focus on impulse buyers looking for new games. The other 55%, located in strip shopping centers and other locations, target value-buyers and hardcore gamers looking for new game titles at value prices. And that often means used.