Pawnshops, Dollar Stores & Discount Retailers May Offer Value
Alan Brochstein Looks at Some Companies With Potential to Do Well in a Weak Economy
The current investment environment has become very challenging for investors. Not only have prices fallen dramatically, but the outlook for growth is becoming cloudier. While many investors react by doing nothing, like deer in a headlight, or perhaps by selling everything, extreme volatility such as the market is enduring can present opportunities.
During this retreat, the selling seems to have been indiscriminant, with the price declines rather uniform across sectors and industries. One way to take advantage of such action is to reposition into industries that might be better able to weather any coming storms, including continued slow growth or even another recession. Three industries that I think should fare well would include dollar stores, off-price retailers and pawnshops.
Dollar stores focus on the low-end consumer and have shifted since the last recession into more non-discretionary items. As such, they aren’t particularly economically sensitive. The four companies that I track would include Family Dollar (FDO), Dollar General (DG), Ninety-Nine Cents Only (NDN) and Dollar Tree (DLTR).
The off-price retailers could benefit from what's known as "trade-down", i.e. getting formerly better-to-do customers who are now trying to economize. The list here is probably much longer than the three I name, but in any list of trade-down retailers I would also include Wal-Mart (WMT), Ross Stores (ROST) and TJX (TJX).
Finally, pawnshops usually benefit in a sluggish or even recessionary environment, as they provide credit to cash-strapped consumers and also offer low-cost used goods to their customers. Unlike other financial companies, the companies that I follow tend to have little or no debt. I have shared this list before, but the names I follow include EZCORP (EZPW), Cash America (CSH) and First Cash (FCFS).
Here is a table that includes some attributes for the ten stocks I have mentioned, sorted by their price decline over the first 10 days of August:
As always, remember that these aren’t recommendations to buy or sell, just ideas for future consideration. You should always do your own research before investing.
Notice that while all ten stocks fallen in price, many of these stocks are still up in 2011. I have included some other data, such as the Net Debt to Capital, forward P/E ratio and the dividend yield.
While it’s not the focus of this post, with the potentially changing economic environment it’s essential to pay attention to a company's debt levels. Having some debt isn’t necessarily a concern, but you should take it into consideration.
So, hopefully I have given you a few candidates to consider if you agree that the industries highlighted may perform well in a continuing environment of weak economic growth. The sharp decline in prices might allow you to reposition your own portfolio. Before investing, you should do your own investigation to identify risks and potential opportunities.
Disclosure: Alan Brochstein is long EZPW currently.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a business relationship with TradeKing.