Looking for a way to diversify out of tech? If you've got an optimistic streak and can stomach some risk, you might want to consider a consumer stock like

Jones Apparel Group

(JNY)

, a wholesale clothing company that markets upscale brands like Jones New York, Todd Oldham, and Lauren by Ralph Lauren. It also owns

Nine West

, a national chain of shoe stores.

Jones' earnings outlook appears relatively upbeat, especially compared with companies in the still-reeling tech industries. "It's likely to grow earnings 18% to 20% this year, and those earnings estimates relative to tech have held up much better. They're more believable, more credible," says David Sowerby, an analyst at

Loomis Sayles

. And the

price-to-earnings ratio is attractive, he adds. "It's trading at a meaningful discount both to the market and the average consumer cyclical stock."

The company's return on equity is 22%, a nice cut above the industry average of 18%, according to

Morningstar

(return on equity measures how much profit a company earns as a percent of stockholders' investment).

But there are some caveats. On the fundamental side, probably the biggest worry is that with $4.2 billion in sales, the company is so big that it'll be hard for it to keep cranking out big revenue gains. Going forward, it will likely have to rely on acquisitions and consolidations to maintain sales and earnings growth. That's always a somewhat risky strategy, though it has worked very well for the company lately.

It's also worth noting that Jones executives have sold a tremendous amount of shares over the past six months, possibly reflecting some wariness about the company's prospects.

Also, investors should consider the risk associated with buying into a consumer-oriented stock at a time when consumer confidence is dipping and many households are presumably tightening their purse strings a little. Though Jones hasn't lowered estimates for this year -- the company reports first-quarter earnings May 2 -- it's certainly vulnerable to continuing troubles in the economy.

A Play on a Rebound

Of course, some investors like the stock for precisely that reason. Because it is so economically sensitive, they reckon, it would get a boost from a general pickup in the economy. "We do anticipate an economic improvement here, and we believe the

retail sector will discount that improvement," says Tim Ghriskey, manager of the

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Dreyfus Aggressive Value fund. In any case, he adds, so far "the weakness in the economy hasn't been a consumer issue," as trouble has been more concentrated at the corporate level.

"It may not seem logical to be buying consumer stocks now. But we feel like this is the place to be," says Susie Pinsky, a consumer analyst for the

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Liberty Acorn fund, which has a stake in Jones. By the time the turnaround happens, it'll be too late to ride gains in consumer stocks, she says.

If you don't buy that argument, you probably shouldn't dip your toe in the water just yet. The interim could be a little choppy for a company like Jones: Analysts have already signaled that earnings comparisons will be difficult this year, on top of powerful double-digit gains in all four quarters last year. Faced with a slowing economy, consumers may be less likely to invest in career clothing, a staple of its business, or more frivolous goods like boots, which propelled growth at Nine West stores last year.

But whether or not you're a member of the get-in-early fan club, Jones isn't a bad consumer play to keep your eye on. There's no question it's a top-quality company in its category. "Among Jones' customers -- the

Wal-Marts

,

Federateds

and

TheStreet Recommends

Mays

of the world -- they're considered to be the best-run company in the industry," says Pinsky.

Besides offering well-made clothing, Jones gets points for offering its store customers a high level of service. For example, its sophisticated tracking systems help keep tabs on where merchandise is in the delivery system, and it delivers its clothing to retailers already tagged and on hangers.

Pants: Everybody Needs 'Em

But how fast can Jones grow?

Lazard Freres

analyst Todd Slater thinks the company can sustain double-digit earnings growth going forward, provided it continues making acquisitions and consolidations. Organic revenue growth should continue at a slower pace, between 5% and 8% a year.

Slater points out that wholesale apparel "is not a high top-line growth industry," but he adds that Jones' organic growth rate is still about 1.5 to 2 times that of the apparel industry as a whole, which is growing at about 3% to 5% a year. "Through a combination of organic growth and acquisitions, Jones has demonstrated in the past that it can significantly outgrow the industry," he says.

Case in point: its purchase of Nine West in 1999, a strategic play that has so far paid off well. Given Nine West's well-publicized business troubles, analysts initially screwed up their noses at the $1.37 billion deal. But Jones' management engineered a speedy turnaround, promptly shuttering hundreds of underperforming stores and debuting a line of Nine West apparel.

The recently announced purchase of

Norton McNaughton

(MAGI)

, which makes moderately priced clothing, should pose no such obstacles. Analysts estimate the addition will boost earnings right away, even before cost-savings in administration and sourcing kick in. For the fiscal year ending in October, McNaughton Apparel posted revenue of $506.3 million, with net income of $26.9 million.

As part of the deal, Jones said it will fork over $275 million (half in cash, half in stock) and assume debt of $297 million for a total transaction cost of $572 million. Following that news,

Standard & Poor's

affirmed Jones' BBB debt rating, while revising its outlook downward from stable to negative. By most accounts, however, Jones has plenty of free cash flow with which to pay off its debts.

Insider Selling Heats Up

One subject that does trouble some investors is a recent acceleration in insider sales at Jones. Since November, CEO Sidney Kimmel has cashed out of $192 million worth of stock, according to

Moneycentral.com. After selling about 5.5 million shares, Kimmel has 7.3 million left. Within the same period, the company's president and CFO have sold stock in the amounts of $9 million and $7 million, respectively.

The company maintains that the sales were nothing out of the ordinary. "On the part of the chairman, Sidney Kimmel, that was diversification. On the part of senior management, where there were some exercises and sales of stock options, it was just normal realization of compensation," says Anita Britt, senior vice president of finance and investor relations at Jones.

And to be fair, those sales aren't necessarily as bearish as they might seem. "Lot of stocks in the apparel industry have performed pretty well recently, and we've seen a bunch of insiders throughout that industry selling as stocks have done well," says Lon Gerber, director of research at

Insiderscores.com, which tracks insider trading. Profit-taking on the heels of a good performance gives less cause for concern than selling as stocks are declining, he says.

According to Insiderscores' figures, Kimmel's sales in the past usually haven't preceded a downturn in the stock. In only three out of 10 cases did Jones' stock trade lower six months after Kimmel had made a sale. The average return on Jones six months after Kimmel sold stock was actually positive, up 8.46%.

While it's important to put that selling in context, it's still not a bullish indicator. One other disappointing note: Investing legend

Warren Buffett

, who bought into the stock in 2000, reversed course and began steadily selling it in February.

On the other hand, as its fans point out, Jones still boasts a decent valuation. Though it's up 13.1% this year, it's currently trading at the low end of its historical P/E range -- 14.6 compared with a median multiple of 19.3. Its average P/E has been as high as 30.2 and as low as 10.3. "It's trading at a meaningful discount both to the market and to the average consumer cyclical," says Sowerby of Loomis Sayles.

Keeping Up With the Joneses
Jones gained 11.8% in the last year, but it's still trading toward the low end of its historical range

Source:BigCharts.com

"Obviously the stock's had a run, relative to the market and on an absolute basis, but we still think it's inexpensive stock," says Dreyfus' Ghriskey. "The only thing we worry about," he adds, "is the emergence of discounting, which depends on how weak the economy gets."

Another potential trouble spot is surging leather prices, which could hurt Jones' $1.3 billion footwear business. Leather prices have risen lately, spurred by an unlikely combination of severe winter weather (which has increased demand for coats), and hoof-and-mouth disease and mad cow disease in Europe (which has decreased the supply of cattle). Jones says it has locked in leather prices via futures contracts through the first half of fall. After that, though, high prices could create problems for the company. A Lazard Freres report suggests that each 5% increase in the cost of leather reduces earnings per share by 5 cents.

Aside from company-specific problems, retailing is by nature a fairly volatile industry, dependent on the fickle whims of consumers from season to season. Many investors might argue that it looks relatively more appealing on the heels of the tech conflagration, though. For investors willing to take some risk, Jones Apparel offers a high-quality play on an economic rebound.