Two Retail Stocks to Own Now
MINNEAPOLIS (Stockpickr) -- The Federal Reserve is investing $600 billion in order to support the fragile economy. The move was made despite an economy that managed to add 160,000 jobs in the month of October.
Why take such an aggressive move when things seem to be stabilizing?
Clearly, things are not as great as we may think. At least, that is the belief of the central bank and its very loose monetary policy. Let's assume for the moment that the Federal Reserve is right. What then?
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Although the economy is growing, such growth is anemic despite the recent performance on the job front. Whatever growth we are getting is not translating into wealth-building. Take away the strong moves in the stock market over the last year or so and most people would say that they are worse off today than they were previously.
Plenty of folks are working harder and getting less. Such a state makes it hard to be a consumer. Instead of focusing on how they can spend consumers are thinking about how they can save.
Can stocks do well in an environment that values saving instead of spending? Those in power will do their best to push investors into stocks, but let's assume for a moment that investors not wanting to be manipulated into buying stocks want to own something that is actually benefiting from the challenges in the economy.
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On the retail front, that translates to discounts, discounts, discounts. The Federal Reserve may be fighting against deflation, but it can do little to discourage consumers from seeking a bargain. Once a deal is found, it is expected that the deal will be there in the future.
That is why many companies do not like to discount. Then again, there are entire retail business models built on the idea of savings and discounts.
Those stocks with such a business
are performing the best in today's market.
One discount retailer that is a must-own is
Costco
(COST) - Get Report
. The Pacific Northwest-based warehouse and members-only club store is beginning to thrive in a savers mentality market. It has taken a bit longer to get traction in these favorable conditions, but with the wind at its sails, I expect good things from Costco from current levels.
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In 2010, Costco has gained just north of 10%, tracking closely to the broader market, but that number pales in comparison to other discount retailers. For example,
Family Dollar Stores
(FDO)
is one of the hottest stocks this year, up more than 75%. Fellow warehouse retailer
BJ's Wholesale
(BJ) - Get Report
is up close to 30%.
Missing from the Costco story that would help push the stock higher is explosive growth. Last fiscal year ending August, the company made $2.93. The estimate for 2011 fiscal year is $3.28. If the number holds, Costco would be growing just over 10%.
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In this case, I think the analysts have it wrong with respect to Costco. Given the landscape, the company is likely to beat estimates as more cash-strapped consumers gravitate to its style of discount stores. Assuming Costco does beat the number, you get a stock that trades for a valuation of 10 to 15 times forward earnings. And if Costco simply matches the number, the stock trades for 19 times expected earnings, not expensive by any measure.
What makes Costco a must-own discount retailer is the expected expansion of the entire discount space. That will benefit Costco greatly and investors will cheer loudly.
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Another discount retailer to consider is
PriceSmart
(PSMT) - Get Report
. This U.S.-based business operates discount stores in Latin America and the Caribbean. It too has seen its stock inch slowly higher this year tracking the rest of the market.
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What I like about PriceSmart is the potential for growth outside our borders. With jobs leaving this country and many heading south of the border, Latin America holds promise. This smaller company with a market capitalization of less than a billion deserves some consideration from investors.
I can assure you that other companies in the industry are looking at PriceSmart as a possible takeover candidate. Earlier this year,
Wal-Mart
(WMT) - Get Report
made a purchase of South African retailer Massmart. Even though that deal may become a majority stake interest instead of a buyout, the interest in foreign operators cannot be denied.
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PriceSmart trades for 19 times the $1.56 annual earnings for the past year. In the 2011 fiscal year, analysts expect the company to make $1.70. Its valuation drops to 17 times the forward estimate.
Over the last few quarters, PriceSmart has beaten estimates by a several cents. Add it all up over four quarters and you get a significant number. As such, I expect the company to make more than the current estimate of $1.70.
Last week PriceSmart announced that October revenue for stores open at least one year was up 18%. The company has 27 stores open with plenty of growth potential. An earnings beat in coming quarters is a lock in my estimation.
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Even without a buyout, PriceSmart is an interesting retail play.
For more retail stock recommendations, check out my
5 Discount Retailers for Cash-Strapped Consumers
portfolio.
-- Written by Jamie Dlugosch in Minneapolis.
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At the time of publication, author had no positions in stocks mentioned.
Dlugosch is the editor of Penny Stock Winners. He has over 20 years of experience in financial markets including investment banking, equity analysis and research and money management. In addition to being the Editor of Penny Stock Winners, he is also a Contributing Editor of InvestorPlace.com and founder and editor of The Rational Investor.
