Premise one: people are not saving much money.
Notice that people have been saving a very small amount of their disposable income. For a short time, the savings rate had gone up during the worst of the recession; however, it has since then dropped by nearly 40% again. This may be related to people's profligate behavior, generally low incomes and increasing non-discretionary expenses. I do not expect people's behavior to change, nor do I expect their incomes to rise in the near term (more on that later). Non-discretionary expenses will only rise, if only because of increasing taxes (one may argue taxes are going up for mostly the rich, but then again the rich are probably contributing the most to the savings rate data). You can appreciate the following chart, referenced directly from BEA.gov:
Premise two: people are not going to save much money in the short to intermediate term.
Unemployment rate is now at/near its 10-year high. In fact, it appears that there is a trend of unemployment increasing since the tech bubble crash of early 2000s. This means more people will have less money, plain and simple. The following graph from US Department of Labor Bureau of Labor Statistics illustrates unemployment data for 10 years to date:
Also, the duration of unemployment is in a megatrend of increase:
So what is the investment thesis here? It is that people do not have much money nor are they likely to get more in the next few years. This bodes well for discount retailers of consumer staples, such as Walmart (WMT, Financial). Walmart is very well established in the US, growing rapidly overseas, including emerging economies such as Brazil, and has what I consider an intermediate to wide moat of being a very low cost retailer. Walmart has just posted an excellent quarter, exceeding its own guidance, and is now trading for 11.7 times the projected 2011 earnings. P/S=0.47, forward dividend yield of 2.40% with a very low payout ratio of 29%, as well as history of share buybacks make this investment even more attractive. The company is also trading for 13.7 times its projected 2010 FCF.
Disclosure: Long WMT.
Notice that people have been saving a very small amount of their disposable income. For a short time, the savings rate had gone up during the worst of the recession; however, it has since then dropped by nearly 40% again. This may be related to people's profligate behavior, generally low incomes and increasing non-discretionary expenses. I do not expect people's behavior to change, nor do I expect their incomes to rise in the near term (more on that later). Non-discretionary expenses will only rise, if only because of increasing taxes (one may argue taxes are going up for mostly the rich, but then again the rich are probably contributing the most to the savings rate data). You can appreciate the following chart, referenced directly from BEA.gov:
Premise two: people are not going to save much money in the short to intermediate term.
Unemployment rate is now at/near its 10-year high. In fact, it appears that there is a trend of unemployment increasing since the tech bubble crash of early 2000s. This means more people will have less money, plain and simple. The following graph from US Department of Labor Bureau of Labor Statistics illustrates unemployment data for 10 years to date:
Also, the duration of unemployment is in a megatrend of increase:
So what is the investment thesis here? It is that people do not have much money nor are they likely to get more in the next few years. This bodes well for discount retailers of consumer staples, such as Walmart (WMT, Financial). Walmart is very well established in the US, growing rapidly overseas, including emerging economies such as Brazil, and has what I consider an intermediate to wide moat of being a very low cost retailer. Walmart has just posted an excellent quarter, exceeding its own guidance, and is now trading for 11.7 times the projected 2011 earnings. P/S=0.47, forward dividend yield of 2.40% with a very low payout ratio of 29%, as well as history of share buybacks make this investment even more attractive. The company is also trading for 13.7 times its projected 2010 FCF.
Disclosure: Long WMT.
