K-Swiss, Cato Defy Consumer Weakness

NEW YORK (TheStreet) -- The consumer may be down, but he's not out, says Steve Scruggs, manager of the Queens Road Small Cap Value Fund (QRSVX), who owns shares of Cato Corp. (CATO) and K-Swiss (KSWS).

The mutual fund, which garners four of five stars from Morningstar ( MORN), has returned 24% over the past year, putting it in the 83% percentile in its Morningstar category. Over the past five years, the fund has risen an average of 6.7% annually, better than 90% of its Morningstar rivals.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

There's a lot of talk about Radio Shack (RSH) going through a leveraged buyout. Do you believe that will occur?

Scruggs: We think that's a very distinct possibility. Their balance sheet is clean. They have of 4,600 stores throughout the country with good traffic locations. We think they would be a really good acquisition for a strategic buyer.

It's not easy being in the women's clothing business, especially now with so much pressure on the consumer. So why do you like Cato Corp.?

Scruggs: Cato is in a really unique niche within woman's retailing. They operate about 1,200 stores, about 4,200-square-foot stores. Mainly in rural areas, in strip malls, anchored by a Wal-Mart is their typical situation. What they do is they are offering clothes similar priced to Wal-Mart but with much more fashion-oriented branding and style. They do a great job with merchandising. And their track record in competing in those niches is fabulous.

Nike (NKE) put up great numbers not too long ago. What does this mean for a company like K-Swiss?

Scruggs: We know K-Swiss is going to piggy back off the rebound in shoe retailing. Nike did recently put out some great numbers and the guidance from K-Swiss has been really good as well. They've been doing some great marketing initiatives and we're really convinced that they are really coming out of a downturn that they've been in for the past several years. We expect them to get back to mid-40s operating margins and, if they do that, we see the stock being worth twice what it is today.

Valassis Communications (VCI) is famous for putting coupons in newspapers. But the newspaper business is dying. So why do you still like Valassis stock?

Scruggs: That has traditionally been their bread and butter, but they have also really started to grow their online couponing. They have a Red Plum subsidiary that's doing quite well, and I think there's a really big future in that and they are poised to take advantage of it.

The truck sector has done phenomenally well but Oshkosh (OSK) shares have lagged. Do you expect this to continue?

Scruggs: Oshkosh is a very interesting company. They are well-known for their military trucks as their biggest, most profitable division right now. But they also make fire trucks, cement mixers and commercial lifts. And that whole business has really been in the doldrums lately, except the military aspects but we see things starting to pick up there. We noticed Carl Icahn took an active position a couple of weeks ago. He announced he was a major holder so we think there's a lot for room for operating improvement as well.

-- Reported by Gregg Greenberg in New York.

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