by David Sterman
The fact that 151,000 jobs were created in October is impressive. The fact that August and September jobs numbers were upwardly revised by a collective 110,000 was even more impressive, as it underscores that things were not quite so bleak as had been feared a few months ago.
Could we now be on the cusp of a robust and sustained upturn in jobs? It's too soon to say. Employment numbers for November and December are hard to handicap, especially since most major companies will hold off on any significant changes in hiring until after we are done with 2010.
Looking into next year, a real case can be made for an improving job picture. Corporations are now flush with cash after a string of highly profitable quarters, existing workers are being pressed to shoulder an unsustainable heavy load, and companies are less likely to fret that we're headed back toward the dreaded "double-dip" recession.
All signs point to "help wanted" signs popping up with more frequency next year.
You also can't forget the retail angle. As employment picks up, new hires will begin to have more cash to spend, which should help retail stocks. Here are three companies that would clearly benefit...
Best Buy (NYSE: BBY)
Shares of this electronics retailer have rebounded roughly +30% since I wrote about it back in mid-September, but I see another similar-sized move coming this winter, pushing shares from a current $45 closer to the $60 mark.
When I looked at Best Buy in September, I focused on the catalysts for the upcoming holiday shopping season. Yet as the calendar flips to 2011, the investment thesis shifts from an impressive product assortment this year to higher consumer spending next year. Let's face it: many of us splurged on consumer electronics a few years ago, but have had to make do with what we have over the past two years. A $1,000 spending spree at places like Best Buy was replaced by a $100 DVD player here, a $200 camera there. But an emboldened consumer that is less worried about losing their job in 2011 will have reason to treat themselves or their loved ones. And to my mind, few retailers can excite a newly-enthused consumer as a place like Best Buy, truly a toy store for adults.
Analysts have started to raise their forecasts for Best Buy, and now think the retailer will boost sales +5% in the next fiscal year (which ends February, 2012) and that per share profits will approach $4. Yet that growth rate really just reflects the company's international expansion plans, coupled with a very modest expansion in its domestic store base and minimal same-store sales growth. Yet that last factor is the wildcard. If consumers are feeling more emboldened, then same-store sales could easily rise at a +5% pace, pushing total company sales +10% higher, and EPS closer to $4.50. Shares trade for about 10 times that admittedly bullish view, but that's far too cheap a multiple for a retailer with such a tremendous track record. Move that multiple up to 13, and shares would rise +30%.
Winnebago (NYSE: WGO)
Even in a lousy economic environment, this maker of recreational vehicles is seeing signs of a solid rebound. The company has blown past estimates for each of the last three quarters and is on track to boost sales +25% in fiscal (August) 2011. Then again, projected sales of $560 million are a far cry from $1 billion in revenue seen in 2004 and 2005.
Per share profits are unlikely to top $0.50 next year, but as investors start to think about the impact of rebounding consumer sentiment, they'd do well to remember that Winnebago earned more than $4 a share when times were good. The stock rallied to $17 earlier this year but has since pulled back to around $11. Shares look like quite the bargain now -- if you believe the consumer will start to stir back to life in 2011.
Citi Trends (Nasdaq: CTRN)
Shares of this retailer, which targets lower-income inner city consumers, has seen its stock fall roughly -45% in the last six months as rising unemployment has been most deeply felt in this target demographic. The company badly lagged profit forecasts for the quarter ended in August and the current quarter, which ends in a few weeks, is likely to be similarly weak.
Yet those trends are obscuring a broader expansion plan that is increasing the company's footprint in major markets. That's why analysts still think sales and profits will rise around +15% both this year and next. That growth rate is lower than what many had expected six months ago, when this upstart retailer was seen to be capable of +20% to +25% growth. Blame it on the tough economy. If employment trends continue to improve, then sentiment may turn positive again for Citi Trends.
A word of caution: the U.S. government may rein in the current extension of unemployment benefits, which would have a noticeable effect on Citi Trends' customer base, so shares may stutter in the next few months, before setting the stage for a rebound in 2011. I like this name as a long-term holding, and investors should be ready to pounce if and when shares fall into the upper teens.
All three of these companies have very strong reputations among their customer bases, yet all also sell discretionary wares, so that great reputation has been of no help while consumers are insecure. An emboldened consumer would flock back to brands they trust, such as Best Buy, Winnebago, and Citi Trends.
Shares of Best Buy have moderate upside, with ample downside protection in the $40 range, while Winnebago and Citi Trends may take longer to be appreciate, but they also sport more upside.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.