I was reviewing my Top 20 Model Portfolio as well as a foundation that I manage, and I was kind of surprised to see how many of my names fall into the Consumer Discretionary space. I started 2009 with a big chunk of the portfolio in several different names in the sector but sold every name into the strength. Lately, we have added several names, including Buckle (BKE), Family Dollar (FDO), Foot Locker (FL), National Presto (NPK) and re-added Timberland (TBL). We have maintained a position in Dorman Products (DORM) since late March. At year-end, we held America's Car-Mart (CRMT), Bed Bath Beyond (BBBY), Men's Wearhouse (MW), Shoe Carnival (SCVL) and Timberland (TBL). We also traded some Thor Industries (THO) early in the year.
We are up over 63% YTD in the Top 20 Model portfolio thanks in part for our heavy exposure to the out-of-favor Consumer Discretionary stocks early in the year. As then, I am not particularly bullish on domestic spending and wouldn't own the sector blindly. Still, I am very optimistic that the names we are in now could fare well, at least relative to the market. Most have a value appeal to their customers and/or a value appeal to investors as well.
I decided to screen the whole sector to see if there might be some other ideas that are consistent with the collection of names to which we have recently migrated. My goal was to identify stories that are working to some degree, that have low valuations and offer good balance sheet protection. Not surprisingly, most of the names I mentioned as owning made the cut. Here is what I did exactly:
- Forward PE < 15
- Net Debt to Cap < 0
- Trailing 4Q revenue growth > 0
- Market Value >$100mm
- P/B < 6
Here is what was generated:
First, please note that my system has a bad symbol - CMRK is actually CORE (Core-Mark). I have highlighted the names that I think are most interesting. Many of these companies have exposure to value-oriented customers from the low-end to the middle markets. These stocks broadly performed very well in 2008 relative to the market (declining a median of <4%), and they are doing much better than the market this year as well (median 44% return). Still, the PE ratios are low. Personally, I see some sustainability in many of these stories.
I have shared some other data as well - note that many of these companies have very low CapEx requirements. I included the change in the estimates lately too in order to get a sense of stability. Most of these estimates are rising.
Some of these names that I know and don't particularly favor include Aaron's (AAN) and PetMed Express (PETM). I have shared my negative views on AAN earlier this year: They are walking on ice as a credit provider of last resort. PETM is interesting, but I am afraid that Amazon (AMZN) will kill them ultimately. Maybe I am wrong - they could buy them too! I liked the old DressBarn (DBRN), but they are in the middle of integrating Limited Too/Tween Brands. The deal just closed and analysts jacked estimates following higher guidance. I haven't looked closely enough, but I get nervous about hugely accretive deals. In any event, they now have Justice, which has been a great concept. My failure to highlight the other names doesn't indicate a negative view, though I am leery of the educational stocks.
As far as why I like the names that I highlighted, I'll hit them in order very briefly. National Presto (NPK) - read the Forbes article, read their filings, think about the alignment and keep your fingers crossed that the ammo business stays ebullient. These guys are going to pay a special dividend again this year, and it should be $7.
Dorman (DORM) is one I have written about on several occasions, most recently here. The key to their success is that cars are staying on the road longer and the trend towards private-label replacement parts.
Core-Mark (CORE) distributes to convenience stores, a very steady business. Buckle (BKE) looks like a short-squeeze brewing. This retailer, focused on denim and tops aimed at young adults, has exceptional management with very large insider ownership. The bear story is primarily that margins are unsustainably high. There is some geographic expansion underway, and I believe that their large exposure to private-label will help them to continue to do well with a middle-market customer focused on value.
Ross Stores (ROST) is one I should probably own. They are drawing down customers, and I guess bears don't expect them to stick around as the economy revives. I find the company to be well-managed. Family Dollar (FDO) is another excellent management story. I like what they are doing and am shocked that investors are paying so much to own larger rival Dollar General (DG).
I shared my perspective 2 months ago with my friends at TradeKing. I don't know TJX Companies (TJX) as well as ROST, but it seems to be a bigger version of the same positive story. I have looked at Dollar Tree (DLTR) in the past. Of all the dollar stores, it is the one that I think does the best job of pulling in customers from higher income-brackets. Finally, Cato Corporation (CATO) is a neat little retailer focused on the low-end for women and juniors. I find the stock very inexpensive.
So, I think that many of these companies could continue to do well in a challenging economy, and it appears that no one is too excited about any of them based on their valuation. Even with a dim view of the domestic consumer, it probably makes sense to dig deeper on these names.