Investing in value stocks often means making counterintuitive decisions. We buy when everyone is selling and staying far away. 

#-ad_banner-#Experienced investors know this as a truism, but it seems downright silly if you compare it to other situations. For example, if everyone is running away from a building, it probably makes sense to also keep away. You wouldn’t disregard the possible danger and rush in yourself, right? We have a built-in auto-response to stick with groups when facing the unknown.

That crowd mentality is deeply ingrained in our psyche, and for good reason. That natural instinct to group together has kept us alive throughout the evolution of our species — those who ignored it aren’t here today.

The environment of the financial markets is not the wild savannah, however. If you invest like everyone around you, your performance will match everyone around you as well. You have to break free of the pack and realize that, to quote the movie “Men in Black”: “A person is smart. People are dumb, panicky, dangerous animals.”

Following the crowd may give you a little peace of mind in the moment, but it’s unlikely to profit you in the long run. Buying a stock while the majority of investors are avoiding it (because they aren’t looking at the big picture) is how value investors get ahead.

The perfect example can be found in the retail sector. 

Some of the down days in the market this month can be attributed to disappointing earnings reports from retail giants like Target (NYSE: TGT), Wal-Mart (NSYE: WMT) and Lowes (NYSE: LOW). This has led investors to reconsider what consumer spending habits mean for markets. 

It’s a good time to find a value stock hidden in the shadows of big names that dominate the daily headlines. We just have to dig a little deeper to find the real value play here.

While earnings in the retail sector may have disappointed analysts, revenue exceeded expectations. That falls in line with National Retail Federation (NRF) estimates of 4.1% industry sales growth for 2014, up from 3.7% last year. The mega-retailers cast a bad light on the industry, but it’s because they’re failing to capitalize on the fastest-growing segment of consumer spending — online sales. 

E-commerce is expected to lead the way for retailers, with projected growth of between 9% and 12% this year. The NRF suggests that an improving housing market and job numbers will encourage spending. The retail industry is responsible for $2.5 trillion of GDP and as U.S. economic expectations rise, so too will the retail sector.

Vitamin Shoppe (NYSE: VSI) is a classic underappreciated value stock. It’s a $1.3 billion specialty retailer that’s profiting from multiple consumer trends — a growing online segment and a niche product that’s in high demand.

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	Flickr/jeepersmedia
	Vitamin Shoppe is a $1.3 billion specialty retailer that’s profiting from multiple consumer trends — a growing online segment and a niche product that’s in high demand.

The preference for healthier living means shoppers are looking to spend more on the items Vitamin Shoppe sells, such as exercise equipment and nutritional supplements. The $185 billion dietary and nutrition supplements market could grow 62% by 2020, according to the Nutrition Business Journal. The company caters to more than just people with numerous pet products on its shelves as well.
     
According to the company’s latest quarterly report, e-commerce sales growth of 17% was the big leader. Management recognizes that the online segment is less capital-intensive than brick-and-mortar stores and is focused on expanding it. Considering that only 11% of its revenue is derived from online purchases, Vitamin Shoppe has plenty of room to run.

Vitamin Shoppe has also set its sights on expanding the e-commerce business, and to this end, it could acquire up-and-coming e-commerce vitamin retailer Vitacost (Nasdaq: VITC). Compared with Vitamin Shoppe and GNC (NYSE: GNC), Vitacost may not have much market share, but it carries absolutely no debt and is expected to grow quickly. Next year’s earnings per share (EPS) growth is anticipated to top 12%, even though Vitacost isn’t yet profitable.

As with any value stock worthy of the label, Vitamin Shoppe has done well with its debt reduction. The company has no long-term debt liabilities, while current liabilities $87 million of match up nicely with its cash holdings of $87 million. EPS growth over the past five years is over 96%, and gross margins have continued to climb every year and are up 57% since 2009.

Risks to Consider: As a niche retailer, Vitamin Shoppe could experience relatively high periods of volatility led by general market conditions. Investors will need to consider a long-term investment approach and be willing to ride out any short-term price fluctuations.

Action to Take –> VSI is down 18% this year but looks oversold based on its relative strength  of 34, providing investors with a buying opportunity. Barclays recently upgraded  the stock, and the average consensus for a price target is $53.15, representing 25% upside from current levels.

VSI data by YCharts

No strategy can protect investors from all market turmoil, but this one comes close. After months of research, my colleague Nathan Slaughter has proven that investing in companies that pay down debt and pay “tax-free dividends” has helped shelter investors from even the worst downturns. Not only has the strategy returned an average of 15% per year since 1982, but it’s outperformed the S&P during the dot-com bubble and the 2008 financial collapse too. To learn more about his “Total Yield” investing strategy, click here.