2011: Looking Ahead to a Better Year – The AIA Advocate Newsletter Week of 9/30/2010

In This Issue:

Looking Ahead To A Better Year

But Not Everyone Will Be Invited

Companies For Lean Times Have A Bright Future

The Bottom Line

September turned out to be an excellent month for the stock market. Over the past 30 days the Dow and the Nasdaq rose an impressive 5.5% and 9.2% respectively. The gains were all the more welcome because many analysts predicted the month would be disappointing because the recovery remains sluggish.

Looking Ahead To A Better Year

We think the stock market is behaving much better than the economy because investors expect conditions will improve in 2011. We’re tempted to be cynical and say that outlook may not be much of a stretch since growth is currently very low. However, even a small uptick in the economy should push many struggling companies back in the chips.

The biggest reason that only a little economic boost should have a big impact on stocks is most companies just spent three years at “Weight Watchers” making their firms lean and mean. As a result, any additional profits should go directly to the bottom line instead of being passed around from cubicle to cubicle.

But Not Everyone Will Be Invited

In the past, when companies did well so did the public. Unfortunately, that’s no longer true for millions of Americans. The lean and mean programs put many people out of work, especially in manufacturing. To make matters worse, many of the lost jobs went to China, and they will not be coming back.

Many white collar technology jobs have also gone overseas, primarily to India – and they are not coming back either. Meanwhile, countless people in the U.S. who remain employed are taking home less money than they did a few years ago.

On the home front, the big financial hit that millions of families took on their homes and retirement accounts is also taking a toll on their ability to spend money. The great home equity consumer binge is as dead as the Roaring 20s.

When you put all the financial problems together you get a poor outlook for millions of middle class people. Unfortunately, their plight is unlikely to improve for several years.

Companies For Lean Times Have A Bright Future

Because millions of Americans are being forced to economize, we think the outlook is good for companies that help them do it. For lack of a better term we refer to the group as the “Lean Times Industry.” Members include any company that can supply essential goods and services at the lowest possible prices.

We are devoting this issue to a review of three of America’s leading low-cost suppliers to the middle class. Most of the companies are already doing well, and they should do even better over the next few years. Here are the stocks that look the most promising to us.

Wal-Mart (WMT)

At the top of the list is Wal-Mart (WMT) the undisputed king of discount stores. http://finance.yahoo.com/q/pr?s=WMT The company needs little introduction since most of America's population lives within reach of Wal-Mart’s nearly 2,750 Supercenters that carry both groceries and household items.

In addition, Wal-Mart owns over 800 standard stores that have not yet been converted to Supercenters. The company also operates over 600 membership-only Sam’s Clubs that compete with Costco.

Wal-Mart is a multinational company. It has stores in Argentina, Brazil, Chile, Costa Rica, Guatemala, Honduras, Mexico, the UK, India, Japan, and China – to name only a few. China, of course, has the greatest potential due to the enormous size of its population. We think Wal-Mart is worth owning for the Chinese connection alone.

This week, Wal-Mart announced a new overseas venture that places the company in line for another big run of profits. The company moved into Africa, a continent we have mentioned several times in this newsletter as having enormous long term potential. Wal-Mart purchased Massmart, a 290 store South African chain that operates in 13 countries – from Ghana on the west coast to Tanzania in the east. The company also operates in Mauritius, an island nation in the Indian Ocean.

In the U.S., one of Wal-Mart’s most promising projects is its new neighborhood stores. Downsizing to street corners will take the company in a different direction from its other retail outlets that just keep getting bigger. For that reason, some analysts think the move is a mistake.

We disagree. The neighborhood store industry (7-11, Circle K, etc.) is enormous. With its power to undercut competitors’ prices, we think Wal-Mart could dominate the neighborhood store industry.

We also like Wal-Mart because its price is attractive. That doesn’t happen very often with this favorite choice of pension funds, insurance companies, and other big-ticket investors. The company has a P/E of just 13.8 and it pays a 2.30% dividend.

Family Dollar Stores (FDO)

Another retail chain that is doing well is Family Dollar Stores (FDO). http://finance.yahoo.com/q/pr?s=FDO As its name suggests, nothing in a Family Dollar Store costs more than a dollar. Not even Wal-Mart can compete in that part of the retail industry. Not surprisingly, this super-deep discounter is attracting many customers who are feeling the economic squeeze.

Family Dollar Stores has a smart business model. The chain of over 6,600 stores in 44 states focuses on everyday items that most families need on a daily basis. The list includes cleaning supplies, toiletries, clothing, shoes, school supplies, and cosmetics. Most of the products are consumables that must be replaced regularly. As a result, customers usually keep coming back.

When the recession got underway three years ago, Family Dollar Stores decided to add some foods to its product line. In keeping with the company’s focus on basic items, the food line includes low-cost packaged meals, soups, cheese, and snacks. Customers with food stamps are welcomed.

During recessions, the retail industry experiences a “shopping down” effect where people go from their usual stores to places that sell what they need for somewhat less. This is helping Family Dollar Stores because many Wal-Mart customers are shopping at the super discounter for many common household products. We think the trend will continue for several years.

With a P/E of 17.4, Family Dollar Stores is valued higher than Wal-Mart. However, the chain appears to be worth the price. The company is profitable and it pays a modest 1.40% dividend.

First Cash Financial Services (FCFS)

We also think First Cash Financial Services (FCFS) will continue to grow in these leaner times. http://finance.yahoo.com/q/pr?s=FCFS The company owns a growing chain of pawn shops where money is loaned against the collateral of its customers’ property. The amount loaned is low enough that if the property is not redeemed, the company can sell it at an attractive profit. The company also cashes checks for many of its customers who don’t have bank accounts.

We realize that many readers may see the pawn business as a seedy enterprise. However, as Paul Harvey liked to say, “Here’s the rest of the story.”

The pawn industry provides financial services to people who the traditional banking industry doesn’t want to deal with. Most banks won’t open accounts for individuals who have few assets and who may have bad credit scores. For such people, First Cash provides ready money that is often badly needed. The fees the company charges are high, but so are the risks it takes with the customers it helps.

In any event, the pawn business is moving upscale. As you may have seen in the popular History Channel show, Pawn Stars, many shops now cater to affluent people who also want to trade their property for cash. Banks won’t accept an expensive Swiss watch or a diamond brooch as collateral, but pawn shops are happy to do so. Some customers even pawn expensive items before they leave for extended vacations because many shops have more secure storage facilities than they do. When the vacationers return home, they redeem their bling.

The pawn business is now under a cloud on Wall Street because the new banking reform law could be a threat to profits. The law establishes a Bureau of Consumer Financial Protection that may draft new rules for storefront financial service firms. However, most of the restrictions the Bureau appears to be planning are aimed at payday loans not the pawn business. First Cash does make such loans but it is phasing them out.

First Cash is having a good year. The company saw its earnings increase 20% during the second quarter while the economy was barely staying above water. The company also has a strong balance sheet with a lot of (you guessed it) cash. The stock carries a P/E of 16.4. It has yet to pay a dividend.

The Bottom Line

Judging from the stock market’s good performance in September, investors expect an improving economy in 2011. However, not all Americans will participate in the upturn. Millions of jobs have been lost in recent years and most of them won’t be coming back. House prices are also unlikely to rebound anytime soon.

As a result, we think the future looks very bright for the Lean Times Industry. Three of its most promising players are Wal-Mart, Family Dollar Stores, and First Cash Financial Services.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next time...


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Posted 09-30-2010 1:26 PM by Research & Editorial Staff