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Alberto Abaterusso
Alberto Abaterusso
Articles (1390) 

Get Defensive Through These 3 Retailers

Dollar Tree tops the list

January 25, 2019 | About:

If an economic recession is just around the corner in 2020, then investors better be prepared for the next market downturn by increasing their positions in high-quality companies.

During the financial crisis of 2008-09, which devastated the market with the S&P 500 Index suffering a substantial decline of 20.4% over the two-year period, there were stocks that managed to surge. 

Most of them were retailers operating in the department and discount industry of the services sector, producing margins of over 30%. The reason why the market rewarded these players is very easy to understand. Even during an economic recession, people still need to buy products they use in their everyday lives, including personal and beauty care products, food and beverages and cleaning products.

While past performance is not a guarantee for the future, it is better to rely on companies that have proven success. Among these companies, I would go for resilient large caps with strong balance sheets, high returns on equity and consistent cash flow. My screener yielded three stocks. 

The first is Dollar Tree Inc. (NASDAQ:DLTR), which soared 122% during the financial crisis.

Shares were trading around $94.6 at close on Thursday for a market capitalization of $22.5 billion. The stock declined 18% for the 52 weeks through Jan. 24, but is still above the 200-, 100- and 50-day simple moving average lines. The closing share price on Thursday were 20.1% off the 52-week low of $78.78 and 23.3% below the 52-week high of $116.65.

I would wait for a significant weakness before adding to a position in Dollar Tree since other indicators, such as a price-book ratio of 2.83 and a price-sales ratio of 0.98 versus medians of 1.73 and 0.48, may signal the current price is not really compelling.

In contrast, the price-earnings ratio of 12.83 is well below the industry median of 18.85. A way to help to decide whether the stock is fairly priced or not is comparing Dollar Tree's earnings yield of 7.8% with the monthly average spot rate of 4.77% that the high-quality market corporate bond is granting to its holders as of November 2018. The earnings yield of 7.8% is the inverse of the price-earnings ratio.

The company is not paying a dividend. In addition to the potential catalyst discussed at the beginning of this discussion, Dollar Tree expects net earnings to grow significantly over the next five years. Consensus is for average annual growth of 9.23%.

As of January, there are 26 analysts who were surveyed on Dollar Tree. Eight analysts have a strong buy recommendation, seven analysts suggest buying and 11 analysts recommend holding the stock.

The average price target is $100.92 per share, reflecting 6.7% upside from the closing price on Thursday.

GuruFocus has assigned to the stock a financial strength rating of 6 out of 10 and a profitability and growth rating of 9 out of 10.

Net sales and operating cash flow are increasing at an average rate of 1.6% and 2.2% every year.

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The second company is Kohl’s Corp. (NYSE:KSS), whose stock was up 38% during the last financial crisis. The company operates a chain of department stores where consumers can find cheaper exclusive and national brand apparel, footwear, accessories, beauty and home decor products.

The closing share price of $68.3 on Thursday was unmoved for the 52 weeks through Jan. 24. While it is still trading below the 200- and 100-day lines, it is above the 50-day line. The share price falls within a 52-week range of $57.89 to $83.28. The market capitalization is $11.3 billion.

The stock has a price-book ratio of 2.09 versus an industry median of 1.63, a price-sales ratio of 0.58 versus an industry median of 0.68 and a price-earnings ratio of 11.41 versus an industry median of 19.95.

Kohl’s is paying a quarterly dividend of 61 cents per ordinary share for a forward dividend yield of 3.51%, compared to an industry median of 2.29%. The retailer has distributed dividends since 2011 and has increased the annual payment by an average of 2.6%.

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The dividend is 40% of net earnings, which are forecasted to grow an average of 10.75% per year for the next five years.

Despite recording flattening net sales, the retailer's operating cash flow is increasing, indicating it is improving the efficiency of its operations.

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The company's financial strength was rated 6 out of 10 by GuruFocus and its profitability and growth was rated 8 out of 10.  

As of January, there are 21 analysts who were surveyed on Kohl’s. Five analysts have a strong buy recommendation, two analysts suggest buying the stock, 10 analysts recommend holding shares and four analysts foresee an underperforming share price.

The average price target is $73.78 per share, reflecting 8% upside from Thursday's closing share price.

The third company is Dillard’s Inc. (NYSE:DDS). The department store outperformed the S&P 500 index by 33% during the financial crisis. Shares declined 8% during the 52 weeks through Jan. 24 and were trading around $63.9 at close on Thursday. The share price is slightly below the 50-day simple moving average line and well below the 100- and 200-day lines.

The stock has a market capitalization of $1.7 billion, a price-book ratio of 1.08 versus an industry median of 1.63, a price-sales ratio of 0.27 versus an industry median of 0.68 and a price-earnings ratio of 7.62 versus an industry median of 19.95. With an earnings yield of 13.1%, the stock is beating the 20-Year High-Quality Market Corporate Bond, which is offering a 4.77% monthly average spot rate.

GuruFocus has assigned a financial strength rating of 6 out of 10 and a profitability and growth rating of 7 out of 10.

Wall Street's recommendations range between hold and underperform. This is because the company has recorded a decline in operating cash flow of 11.5% on average every year over the last five years.

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Regardless, the company can still afford to pay a quarterly dividend of 10 cents per ordinary share. The generation of cash flow is still consistent as the payment rate has regularly increased. 

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The forward dividend yield of 0.63% is still below the industry median of 2.29%.

Annual net earnings are forecasted to grow 5.42% for the next five years. If this expectation materializes, it will drive the share price higher.

Disclosure: I have no positions in any securities mentioned in this article.

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About the author:

Alberto Abaterusso
If somebody asks what being a value investor means, Alberto Abaterusso would answer, “The value investor is not just the possessor of the security that represents the company, but he is the owner of that company. As an owner of the company the value investor is actively involved in the dynamics of that company and his first concern is how to have sales progressively growing. Also, the value investor is probably one of the most demanding persons in the world concerning sales.”

Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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