Business review site Yelp reports 132,580 businesses closed from March 1 to July 10:
Source: Yelp Economic Average Report
You can see in this chart that the number on the left-hand side had been higher. You would think that is a good sign. But it’s misleading.
When we first put the brakes on the economy, many businesses closed.
They hoped the closure would be temporary.
Many of them reopened, as you can see. But they continued to struggle. Little by little, they closed again.
One scary part about this is: Of the 132,000 companies that have closed, nearly 73,000 of these closures are permanent. That number has jumped by more than 15,000 since June 15.
Unfortunately, it makes sense.
If you close a business — even for a short time — it’s expensive to mothball it and then reopen. You have to continue to pay expenses while you have limited, or no, sales.
But if you are a business owner you are excited to reopen. To return to “normal” life. To see your regulars. So, you spend the money to give it another try.
Then, imagine you had to close again after you reopened. Your local or state government took the wind out of your sails. In addition to the exasperation, you’re out a lot of money.
Why bother trying again?
That’s what we’re seeing in a lot of states.
Weak Economy Means These Companies Benefit
When the economy struggles, bankruptcy filings increase.
Compared to the first half of 2019, we’ve seen a 26% increase in companies filing for bankruptcy. More than 3,600 companies filed through June.
You’ve seen the announcements in the news.
The first notable retail bankruptcy was Pier 1. Then J. Crew, Neiman Marcus, J.C. Penney, Tuesday Morning, GNC, Brooks Brothers … and more.
The weak economy has hurt energy companies, too. Less operations mean less demand. Big names like Whiting Petroleum and Chesapeake Energy have succumbed to their debt loads.
And with trends like we’re seeing above, the number could increase in the second half of the year.
I was on Matt Clark’s The Bull & the Bear podcast on June 24.
Our conversation that day was real. We talked about how our economy is struggling. It’s not a fun topic, but it’s reality.
I told Matt about some names that should do well as the weak economy continues and companies fail.
Since then — roughly a month ago — the S&P 500 has done well. It’s up 7.5%. But three out of four of these names have outperformed it:
| Company | Ticker | Total Return, 6/24-7/22/20 |
| FTI Consulting | FCN | 12.0% |
| Ritchie Bros. Auctioneers | RBA | 11.1% |
| Heritage Global | HGBL | 8.1% |
| Houlihan Lokey | HLI | nil |
Source: Bloomberg
And that’s because they offer services for these struggling companies.
Outside of cutting checks and incurring debt, the government has found it difficult to control this pandemic. We’ve all seen the results.
And as we’ve noted above, more businesses that shut down temporarily are failing outright.
That’s not good for our economy. But it’s good for these stocks. As an aside, HLI and RBA pay about a 2% dividend yield.
These stocks have peers, too. If you’re looking for other ways to invest in this weakness (that sounds terrible, doesn’t it?), I encourage you to seek them out as well.
Good investing,
Brian Christopher
Editor, Profit Line and Flow Matrix Alert
Banyan Hill Publishing