Retailers for a Recession

Posted by Wayne on May 27, 2008 – 2:14 pm

As I was doing my usual bout of “marathon weekend reading” I came across an interesting piece on Warren Buffett’s recent trip overseas.  For those who don’t keep tabs on the “Oracle”, Buffett has been touring Europe for the last week or so in an effort to promote Berkshire Hathaway on the other side of the pond.

Reason being, Buffett’s looking to start buying up “family owned, privately held” businesses on the cheap overseas.

It’s difficult for him to find “Buffett-sized” deals in the US anymore, so it only makes sense that he’d look for greener pastures elsewhere.  However, Buffett also gave another reason for why he might want to start placing his bets in other parts of the world…

My friends and I have been debating the “recession” topic for a while now:  Are we currently in one?  Will we run into one this year or next?  What will the effects be?

But when I read that Buffett thinks the US is already in a recession and it will be “longer” and “deeper” than any we’ve seen for quite some time, I definitely began to think less about “what if we go into a recession” and more along the lines of “What should I do with my money now?”.

There are dozens of questions (and even more answers) on TickerHound about which sectors hold up the best during a bear market, but a recent question is what inspired me to write today’s article:

“Will certain retailers do well during a recession?“

Traditionally, most retailers won’t do well at all during a downturn – consumers start to curtail their discretionary spending as times get tougher, and items like clothes, cars and all the other little “extras” aren’t ranked very high on the “purchasing priority list”.  However, if you really think about it, there are some retailers that “should” do rather well during a protracted downturn.

The fact of the matter is, people aren’t going to completely stop buying the little extras, they’ll just be more selective about where they buy them.

While I’ve come a long way since my childhood, I still remember what it was like when times were tough around my house.  We were a blue collar household, 3 kids, my parents were always hustling at the end of each month to make ends meet – so when one of us needed new clothes, school supplies, etc, we’d take a trip to the closest discount store and bargain hunt.

Without doing a survey of every household in the US, I’d bet that when times are tough and a recession is imminent, most of America behaves the same way.  In fact, if you take a look at a 10 year chart for some of the discount retailers, you’ll immediately see that their stocks do better when the market is doing worse!

So here are a few discount retailers that I think are worth digging into if you’re looking for some “Retailers for a Recession”:

1.  Dollar Tree (Nasdaq: DLTR)

• Market Cap:  $2.99 Billion
• P/E:  15.67
• Dividend:  N/A
• 12 Month Price Gain (Loss)%:  (19%)

2.  Family Dollar Stores (NYSE: FDO)

• Market Cap:  $2.76 Billion
• P/E:  13.5
• Dividend:  2.5%
• 12 Month Price Gain (Loss)%:  (40%)

3.  Fred’s (Nasdaq: FRED)

• Market Cap:  $438.65 million
• P/E: 41.13
• Dividend:  .7%
• 12 Month Price Gain (Loss)%:  (25%)

4.  99 cents Only Stores (NYSE: NDN)

• Market Cap: $538 million
• P/E:  85
• Dividend:  N/A
• 12 Month Price Gain (Loss)%:  (46%)

As you can see from this list, these stocks show a wide range of market caps and P/E ratios.  But the one thing they do have in common is that all of their stocks have taken a beating since the 2001 – 2003 bear market ended.

However, during the bear market these stocks were hitting new highs while the rest of the market was going down the toilet…is there a theme here?  You betcha!

Now, this isn’t to say you should run out and start buying discount retailers tomorrow – some of these companies are still working out some operational issues, over expansion problems, etc.  But for the most part, if you’re going to take a position in retail as we head into Buffett’s “long and deep” recession then these are the companies you want to be looking at!

Click here to suggest some of the retailers you think will do well during a recession.