12 Consumer Stocks: Sterne Agee's Top Picks for 2011

NEW YORK ( TheStreet) -- The consumer sector still has a long way to go before the market can declare a full recovery. Nonetheless, there are still some opportunistic stock picks within discretionary stocks in 2011.

Of course consumers will remain cautious in the near term, with the consumer confidence index hovering in the low 50s, unemployment holding stubbornly at around 10% and prices at the pump once again rising.

The high-end consumer, however, is recovering faster than other categories, and companies that cater to this market could have a Happy New Year.

In light of all this, Sterne Agee analysts have compiled their top picks in the consumer sector in 2011. Here's a look at which they believe are poised to pop.....

Melco Crown Entertainment

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Melco Crown Entertainment ( MPEL) was among the biggest stock gainers in the casino sector in 2010, and is poised to continue with this momentum in the New Year.

The casino operator has benefited from being the only pure-play on Macau gaming, a region that has been one of the only sources of growth within the sector amid the recession.

Sterne Agee analyst David Bain upgraded the stock earlier in the week following yet another surge in gaming revenue in Macau in December. The region reported a 66% spike in revenue during the month to $2.36 billion, and analysts predict January or February could be a record month for the market.

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"We believe the valuation disconnect between Melco and other U.S. gaming operators with exposure to Macau is too great," Bain wrote in a note.

One tailwind for Melco is its upgrade to its flagship City of Dreams property. The company plans on rolling out 18 additional VIP tables by the first quarter of 2011 and has land to open up additional hotel capacity.

The VIP arena is expected to be the biggest area of growth in Macau in 2011, so the timing of these new tables perfectly coincides.

In its third quarter, Melco reported a surprise profit of 3 cents a share, as revenue ballooned 75% to $504 million. City of Dreams generated a profit of $114.9 million, compared with $46.6 million in the year prior.

At the end of the third quarter, Melco had $660 million in cash and about $2 billion in debt.

Penn National Gaming

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Penn National Gaming ( PENN) is poised to be the biggest winner among regional casino stocks in 2011.

"Even if the domestic consumer remains soft in 2011, Penn should outperform other regional operators due to recent expansions and an underappreciated pipeline," Bain wrote.

In the third quarter, the company rolled out table games at its West Virginia and Pennsylvania facilities, which led Penn to see profit more than double during the quarter. Penn also opened its Maryland slot casino at the end of the year, which should drive positive EBITDA growth past the second quarter of 2011.

Heading into 2012, Penn also has one development in Kansas and two in Ohio in the pipeline.

In November, Penn announced it is making its first foray into Las Vegas with the purchase of M Resort for $230.5 million. The high-end casino cost $1 billion to build, and Anthony Marnell III spent an additional $240 million for the land. Penn now gets a relatively brand new casino for a fraction of the total cost of the project, and less than even the price of the land itself.

Looking ahead, Penn now expects 2010 full-year earnings of $1.15 a share from prior guidance of 98 cents, and is calling for revenue of $2.46 billion from $2.44 billion.

American Public Education

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American Public Education ( APEI) is one of the leading companies in the for-profit education space, and has been speculated as a potential takeover target.

Sterne Agee holds a buy rating on the company, which caters to the needs of the military and public service communities through its American Military University and American Public University, and upped its price target to $43 from $37, citing an above-average growth rate with below-average regulatory risk.

"From a regulatory risk standpoint, we continue to believe that while not immune, American Public remains in a significantly better position that most of its peers due to its military focus, low tuition, low Cohort Default Rates and high repayment rates," analyst Arvind Bhatia wrote in a note.

Bhatia says he expects revenue and EPS to grow about 20% annually for the foreseeable future, driven by strong civilian enrollment growth and stabilization in military enrollment growth.

American Public's exclusive agreement with Wal-Mart ( WMT) also provides a long-term opportunity to allow the company to expand its brand in the civilian segment. Over time Bhatia estimates that the deal could potentially add between 20 cents and 60 cents a share to EPS.

APEI's average student loan repayment rate was 47% last year, according to the Department of Education, better than most of its sector peers. The school operator said it had 77,700 students as of Sept. 30, a year-over-year increase of 31%.

Total revenue for the first nine months of the year grew 35% to $141.9 million. Net income increased 30% in the period to $20.3 million, or $1.07 per share.

Take-Two Interactive

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It was a breakout year for Take-Two Interactive ( TTWO), as the video game publisher proved it's not just a one-trick pony.

For the first time in the company's history, it achieved profitability in a year without a release of a Grand Theft Auto game. This profitability was primarily driven by the release of Red Dead Redemption and strong sales from the company's NBA franchise with the release of NBA 2K11.

Bhatia says that Take-Two's shares are currently trading below their intrinsic value per share, and believes the Red Dead Redemption and Grand Theft Auto franchises are alone worth $10 a share. The company's MLB contract, which has been a drain on earnings, also expires in 2012, and should benefit the bottom line.

Take-Two's next big catalyst, the launch of the next game in the Grand Theft Auto franchise, is expected to occur in March 2012, Bhatia says.

Take-Two also represents an attractive takeover candidate, Bhatia says. Carl Icahn continues to add to his stake and is currently the largest shareholder, with a 13% stake and three board seats.

The company has been a target in the past when Electronic Arts ( ERTS) attempted to purchase the company in 2008 for $25.74 a share, but Take-Two said this offer was too low.

BJ's Restaurants

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BJ's Restaurants ( BJRI) represents one of the few early-stage growth stories in the sector, making it one of Sterne Agee's top picks for 2011.

With just 102 restaurants in 13 states, the company has the potential to grow domestically to nearly 500 units, predicts analyst Lynne Collier.

Same-store sales at BJ's have outpaced the industry average, a trend Collier expects to continue in 2011 as it gains market share at the expense of its competitors. As a result, she upped her price target on the stock to $40 from $33.

BJ's manages to outpace the sector, even as a bulk of their locations are in California, a market hit particularly hard by unemployment.

In its third quarter, BJ's reported a 70% surge in profit, as revenue jumped 24% and same-store sales increased 6.7%.

BJ's has done well in its in the upper-mid-scale-casual segment due to its strong focus on customer service.

Coach

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Coach ( COH) fared better than most amid the recession, making timely moves that protected its bottom line.

Its biggest story is in China, where the handbag maker has been aggressively expanding its square footage. In 2011 Coach plans on opening at least 25 stores in the market, where its product is resonating well with the growing Chinese middle class.

Coach has forecast a 75% year-on-year growth in sales in China during fiscal 2011 and expects China to surpass Japan as its second largest market within five years.

During the economic downturn, Coach also put emphasis on its accessible luxury image in 2009, increasing its selection of handbags priced under $300 with the launch of its Poppy collection. At the time of its launch, the line was a significant departure from Coach's usually aesthetic, but served to reach a younger demographic and generated excitement.

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Coach is also putting into place several other initiatives that will help sustain its growth over the next several years, including the launch of a higher end RK collection, the opening of men's test stores in the U.S. and the first of 10 men's factory stores, and its recent entrance into Western Europe.

In its third quarter, Coach earned $188.9 million, or 63 cents a share, a 34% surge from $140.8 million, or 44 cents a share, in the year-ago period. Revenue jumped 20% to $911.7 million, while North American sales at stores opened at least a year grew 8.5%, the biggest gain since the fourth quarter of 2008. The same measure rose 3% in Japan and by double digits in China. The quarter marked Coach's strongest sales and earnings beat in over two years.

But the company did not provide guidance for 2011, which caused some investors to remain cautious on the stock.

Pier One Imports

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Pier One Imports ( PIR) has finally gotten its turnaround on track and was one of the biggest stock gainers in the retail sector in 2010.

The company reported its fifth consecutive quarterly profit and same-store sales gain in the third-quarter, following several years of losses.

During the quarter, the home goods retailer earned $21 million, or 18 cents a share, compared with a profit of $38.8 million, or 37 cents, in the year-ago period. Analysts were calling for a profit of 14 cents a share. Sales rose 8.2% to $353.8 million, while same-store sales climbed 10.2%.

Pier 1's recovery over the past year can be attributed to its improvement in assortment, and in the third quarter it decided to begin offering more seasonal decorative merchandise. It has also returned its "treasure hunt" element to the brand.

In an effort to cut costs, the company has also shuttered stores, negotiated lower rents and reduced its workforce.

"We are encouraged by what we perceive to be a subtle switch from defense to offense, with reinvestments in the business beginning in fiscal 2011, including increased marketing, the beginnings of a store refresh program and groundwork laid for a return to on-line selling, perhaps later this fiscal year," Sterne Agee analyst Jennifer Milan, wrote in a note.

Still, one potential headwind Pier One faces in 2011 is pressure from sourcing costs. The company already has had to implement some price increases, Milan said, but so far hasn't seen an impact on sales.

Deckers Outdoor

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Deckers Outdoor ( DECK), the maker of the infamous Ugg boots, has significant growth opportunities in 2011, making it one of Sterne Agee's top picks in the footwear sector.

The company is planning on continuing to expand in the U.S. and in international markets. Analyst Sam Poser believes the Ugg retail store base can grow from 27 locations to 42 stores by the end of the year. Most of this store growth is expected to come through international expansion, specifically China.

China currently has just four Ugg stores, but Poser says it could have more than 50 locations in the near future.

During the year, Deckers converted its UK, Benelux and France distributors into subsidiaries, which represent a large growth opportunity for the company.

For the Ugg brand in 2011, investors can expect an improvement in the men's assortment, a new outerwear collection and handbags.

Nike

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Nike ( NKE) still remains a compelling long-term story, with meaningful sales and margin growth opportunities.

Nonetheless, Nike's stock took a hit following its second-quarter earnings report. While both profit and revenue significantly topped expectations, Wall Street was disappointed by the company's futures orders.

But futures were far from lackluster, as Nike said orders slated for delivery from between December 2010 and April 2011 rose 11% to $7.7 billion.

"The recent weakness in the stock after the second quarter release was overblown and resulted from expectations of extremely good future orders, and instead Nike reported very good futures orders," Poser wrote in a note.

"Given the expected weakness from other players in the market such as Skechers ( SKX), we believe Nike has enough levers and momentum to provide upside to our expectations," Poser wrote in a note.

Nordstrom

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Nordstrom ( JWN) has proven that the luxury shopper is leading the retail recovery.

The high-end department store is benefiting from a much healthier affluent customer, who is experiencing stronger employment, income, confidence and wealth trends.

"While merchandising margins are approaching peak levels, there remain levers to drive them to higher plateaus," Sterne Agee analyst Kenneth Stumphauzer wrote in a note. He also acknowledges that Nordstrom is the most insulated retailer to inflationary pressures that are looming.

In its third quarter Nordstrom earned $119 million, or 53 cents a share, a 43% surge from $83 million, or 38 cents, in the year prior. Revenue grew 11.2% to $2.18 billion from $1.96 billion, while same-store sales grew 5.8%.

For the full year, management expects earnings in the range of $2.60 to $2.65 a share, which was revised from prior outlook of $2.50 to $2.65 a share. Analysts are calling for earnings of $2.64 a share. Nordstrom also foresees same-store sales rising 6% for the full year and its gross margin profit rising between 1 and 1.5 percentage points.

Hasbro

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Hasbro should be a standout in 2011 as it transforms from solely a toy company to an entertainment/licensing hybrid.

In 2010, the stocks gained more than 50%, and the New Year marks the beginning of a multi-year period of strong entertainment lines from Lucas, Marvel and Habro Brands, Sterne Agee analyst Margaret Whitfield says. She predicts that by 2015, entertainment and licensing could be 30% of operating income with margins estimated at 70% in this segment, which could lift overall company operating margins into the 20% area from the near-term goal of 15%.

Hasbro's new children-focused television network, The Hub, is demonstrating sequential growth in ratings, with all-day viewership of 34,000. Not only is the venture generating incremental advertising revenue, it also offers a venue to market Hasbro's toys and games.

Since 2007, Hasbro has grown sales and net income 3.9% and 11%, annually.

Jos. A. Bank

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Men's apparel retailer Jos. A. Bank ( JOSB) is favored by Sterne Agee due to its multiple growth drivers.

The company has expansion opportunities in its tuxedo rental business, factory outlets and big and tall units. Whitfield estimates that its tuxedo-rental initative alone could contribute 25 cents a share to fiscal 2011 earnings on revenue of $36 million.

Jos. A. Bank should end the year with cash of $9.42 a share, which Whitfield expects will be used over time to build its tuxedo rental infrastructure and inventory.

In its third quarter, Jos. A. Bank reported a 7.7% jump in earnings to $12.6 million, or 45 cents a share, from $11.7 million, or 42 cents, in the year-ago period. Revenue grew 7.4% to $173.3 million. But both profit and revenue fell short of Wall Street's estimates.

--Written by Jeanine Poggi in New York.

>To see these stocks in action, visit the 12 Top Consumer Stocks portfolio on Stockpickr.

>To contact the writer of this article, click here: Jeanine Poggi.

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