Slowing retail sales and weak consumer confidence have hurt most consumer stocks. Clothing is largely a discretionary purchase, so the downturn has been particularly hard on these three apparel-related companies. Based on the steep drop in their stock prices, it appears that investors feel they will not survive. We have a more optimistic view. All three are lowering their operating costs and shedding unprofitable businesses. That puts them in a good position to expand their earnings once the economy turns around. Their leading brands will also give them an advantage as conditions improve. All three should reward patient investors, but only two are buys right now....

MTS SYSTEMS CORP. $27 (Nasdaq symbol MTSC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 16.9 million; Market cap: $456.3 million; Price-to-sales ratio: 1.0; WSSF Rating: Average) makes equipment and software that manufacturers use to test the mechanical behaviour of materials, machines and structures. This helps them reduce errors and costs. Testing systems account for 80% of MTS’s revenue. The remaining 20% comes from making sensors that improve the performance of automated industrial machinery.

Small company flies under the radar

As part of our three-pronged approach to investing, we advise you to downplay stocks that are in the broker/media limelight. (The other two prongs are to focus on well-established companies and to spread your money across the five main economic sectors.) MTS operates in a narrow, highly technical field, so it attracts little attention from analysts. MTS has a long history of increasing its revenue and earnings. Revenue grew 39.4%, from $330.3 million in 2004 to $460.5 million in 2008 (MTS’s fiscal year ends September 30). Earnings rose 77.5%, from $26.5 million in 2004 to $47.1 million in 2008. MTS is an aggressive buyer of its own stock. As a result, earnings per share rose 116.1%, from $1.24 in 2004 to $2.68 in 2008....

MICROSOFT CORP. $18 (Nasdaq symbol MSFT; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 8.9 billion; Market cap: $160.2 billion; Price-to-sales ratio: 2.4; WSSF Rating: Above Average) plans to cut 5,000 jobs, or 6% of its workforce, in an effort to lower its annual expenses by $1.5 billion. The cuts are largely due to slowing sales of computers preloaded with Microsoft’s Windows and Office programs. In the three months ended December 31, 2008, earnings fell 11.3%, to $4.1 billion from $4.7 billion a year earlier. Earnings per share fell 6.0%, to $0.47 from $0.50, on fewer shares outstanding. Revenue rose 1.6%, to $16.6 billion from $16.4 billion. Microsoft has no debt, and holds $20.7 billion, or $2.33 a share, in cash. This should let it maintain its high research spending, which accounts for 14% its revenue, and develop new products that will cut its reliance on Windows and Office, which supply about 60% of its revenue. Microsoft is a buy.

XEROX CORP. $7.44 (New York symbol XRX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 864.8 million; Market cap: $6.4 billion; Price-to-sales ratio: 0.4; WSSF Rating: Average) earned $985 million before restructuring charges in 2008, down 13.2% from $1.1 billion in 2007. Per-share earnings fell 7.6%, to $1.10 from $1.19 on fewer shares outstanding. Revenue rose 2.2%, to $17.6 billion from $17.2 billion. Xerox gets roughly 50% of its revenue from outside the United States, so the higher U.S. dollar dampened its growth in 2008. Steady demand for services (48% of 2008 revenue) should help Xerox offset weaker demand for new printers and copiers. Recent cuts to its workforce should also save it $200 million a year. Xerox is a buy.

H&R BLOCK INC. $22 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 338.9 million; Market cap: $7.5 billion; Price-to-sales ratio: 5.2; WSSF Rating: Above Average) generates most of its earnings by preparing income tax returns for its clients. It also sells its “TaxCut” tax-preparation software, which lets individuals prepare and electronically file their own returns with the IRS. In December 2008, TaxCut increased its share of the tax software market to 19% from 15% a year earlier. It appears the gain is largely due to a price increase by Intuit Inc., whose TurboTax program controls 80% of this market. Still, customers tend to stick with the same tax program each year, since new versions can easily import data from the previous year’s program. A growing customer base should help increase the long-term profitability of the TaxCut operations. H&R Block is a buy.

CINTAS CORP. $24 (Nasdaq symbol CTAS; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 152.8 million; Market cap: $3.7 billion; Price-to-sales ratio: 0.9; WSSF Rating: Average) earned $71.8 million in its second fiscal quarter, ended November 30, 2008, down 13.3% from $82.9 million a year earlier. Per-share earnings fell 11.3%, to $0.47 from $0.53. Rising unemployment has hurt demand for Cintas’s uniform rentals and other business services. Cintas now plans to close two of its plants, which should improve its future profitability. Revenue grew just 0.1%, to $985.2 million from $983.9 million. Despite the lower earnings, Cintas reduced its debt by $80 million in the latest quarter. The company’s long-term debt now stands at $869.7 million, which is a manageable 25% of its market cap. Cintas also raised its annual dividend 2.2%, from $0.46 a share to $0.47. It now yields 2.0%. Cintas has increased its dividend each year since it became a public company in 1983. Cintas is a buy.

GENERAL ELECTRIC CO. $14 (New York symbol GE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.5 billion; Market cap: $147 billion; Price-to-sales ratio: 0.7; WSSF Rating: Above Average) has moved down in the past few months over concerns about the quality of assets at GE Capital, its finance unit, which accounts for a third of its gross profits. Due to writedowns and other charges at GE Capital, GE’s overall earnings fell 19.1% in 2008, to $1.78 a share (a total of $18.1 billion) in 2008, from $2.20 a share (a total of $22.5 billion) in 2007. Revenue grew 13.3%, to $112.8 billion from $99.5 billion. The company now aims to trim its expenses by $1 billion in 2009. That should allow it to keep paying its $1.24 dividend, which yields 8.9%. A dividend cut is still possible, particularly if GE loses its AAA credit rating, which would drive its interest costs up. But GE should benefit from rising government infrastructure spending. GE’s infrastructure businesses accounted for 54% of its 2008 profits. GE is still a buy for long-term gains.

Some investors base buy and sell decisions in part on p/e ratios (the ratio of a stock’s price to its per-share earnings). When we provide a p/e, we try to eliminate all one-time items from earnings. These include writedowns, investment gains or restructuring charges. This gives you a clearer, truer view of a company’s profitability. For decades, investors have used p/e’s to spot undervalued stocks. But a low p/e can signal danger rather than a bargain. That’s why you need to look at p/e ratios in context. In addition to p/e’s, we look at a variety of measures that identify value and risk. One of our favourites is the price-to-sales (p/s) ratio: the share price divided by sales per share....

Gold moved up from $300 an ounce in the early part of this decade to over $1,000 in 2008. It fell to $700 in November 2008 as the stock market bottomed out. Like the stock market, gold has regained some of its losses and now trades at around $900. We feel gold will eventually surpass its recent highs. We also feel that the best way to profit from rising gold is through Newmont Mining. Its high-quality mines should last decades, and its costs are coming down. As well, most of its production is in politically stable areas, such as North America and Australia. NEWMONT MINING CORP. $39 (New York symbol NEM; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 454.3 million; Market cap: $17.7 billion; Price to- sales ratio: 3.4; WSSF Rating: Average) is one of the world’s largest gold mining companies, with major operating gold mines in the United States, Canada, Australia, Peru, Bolivia and Ghana. Gold accounts for about 85% of Newmont’s revenue. The remaining 15% comes from copper, zinc and other metals. Most of Newmont’s copper comes from its 45% stake in the large Batu Hijau mining complex in Indonesia....

AEROPOSTALE INC. $20.08 (New York symbol ARO; SI Rating: Extra Risk) (646-485-5410; www.aeropostale.com; Shares outstanding: 66.8 million; Market cap: $1.3 billion) is a mall-based specialty retailer of casual clothing and accessories. The company mainly targets 14- to 17-year-old women and men. Aeropostale provides high-quality, active-oriented fashion merchandise at value prices. The company maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise. Aeropostale sells its products only in its own stores, on-line thorough its web site or at organized sales events at college campuses. Young women’s fashions make up about 71% of Aeropostale’s sales; young men’s fashions make up the remaining 29%. Aeropostale first sold shares to the public at $8 (adjusted for share splits), and began trading on New York in May 2002....