Sadly, troves of Americans are now suffering the effects of a downturn in the U.S. economy.
M&M Chief Investment Strategist Adam O’Dell
According to the Department of Labor, around 21 million Americans are unemployed, while many more are in precarious situations as businesses only timidly reopen following the coronavirus-led shutdown.
That means a groundswell of folks are suddenly getting more careful with their dollars. Though many were happy to pay in cash for essential consumer goods in 2019, more people will be turning to creative financing options this year to bridge the gap between lesser cash flows and the persistent need for certain household items.
And while this new trend of frugality is bad news for some businesses, it presents opportunities, even tailwinds, for others…
Discount Retail Wins in Tough Times
If you look back to the last recession, you’ll see clear evidence of outperformance among “discount retail” operations.
Dollar Tree (Nasdaq: DLTR) is just one example.
Between October 2007 and October 2011, shares of Dollar Tree soared more than 170% higher, while the broader stock market was still struggling to regain lost ground.
Have a look …
So why would we expect it to be any different this time around?
Even though I’m confident the U.S. economy will recover from the COVID-19 shock, in one form or another, it’s unreasonable to expect all Americans’ finances to immediately snap back to “normal,” pre-COVID condition.
Rent-A-Center Is a ‘Strong Buy’
For many, big-ticket household items will need to be financed through rent-to-own shops, like Rent-A-Center Inc. (Nasdaq: RCII).
For folks who now struggle to put down thousands of dollars for essential household items, Rent-A-Center allows them to lease items, often without a credit check or much cash up front. This gives customers the flexibility to pay for the items in regular installments until they eventually take full ownership.
For those facing tough times, Rent-A-Center can help bridge the gap as it works to recover from the sudden economic shock we’re all experiencing in various ways.
And for investors, the tailwind provided by millions of now-frugal consumers is an opportunity to outperform the broader market for years to come… much as we were able to do in Dollar Tree Inc. (Nasdaq: DLTR) during the last economic downturn.
My proprietary, multi-factor stock rating system is already picking up on an attractive opportunity in Rent-A-Center…
It’s one of the highest-ranking stocks in the market today. Specifically, it scores highest on the value and quality factors, which are known to drive long-term outperformance…
- Value — Rent-A-Center’s valuation metrics blow away the rest of the specialty retail industry. Its price to earnings is 6.5 versus the industry’s 20.1. The company’s price to cash flow is 1.6 while the industry average is 11.1. Those are meaningful differences, highlighting just how attractive a buy Rent-A-Center is at current prices.
- Quality — Rent-A-Center has very strong cash flow, last reported at $187 million. And if that’s what they’re bringing in now, just imagine by how much this could grow in the coming years as more folks choose this route for household purchases! The company also generates a very strong return on equity and return on assets. Its ROA is 13.1% compared to minus-0.2% for the rest of the industry. Its ROE is 55.9% compared to the industry’s minus-3.8%.
As you can see, my rating system shows Rent-A-Center is both a quality company and its stock is a great value… making it a “Strong Buy” in this new-normal economy.
To good profits,
Adam O’Dell
Chief Investment Strategist, Money & Markets
• Using his unique blend of technical and quantitative analysis, Adam’s sole focus is to find and bring you investment opportunities that return the maximum profit with minimum risk.
