Contrarian Bets For The New Economy

By Sham Gad | June 22, 2009 AAA

For nearly 30 years the consumer has been critical to the U.S. economy, as consumption constitutes two-thirds of GDP.
All indicators suggest that the patterns inU.S. consumption are undergoing a major transformation. With U.S. savings declining for a over a decade and turning negative at the height of the real estate market, savings have now turned positive. If that trend continues, then investors looking to achieve above-average returns will need to focus on the basic needs of consumers; folks need to eat, drive to work, stay healthy and have a place to live.

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But aside from the obvious businesses that fulfill this need, like food producers, there are some interesting plays with outsized investment returns that will likely make it through this new economy and be in a prosperous position.

Florida Still Shines
The St. Joe Company (NYSE:JOE) is one of the largest private land owners in Florida. During the housing bubble, shares traded at $80, but are now at $26, which values the company at $2.4 billion. Over the past few years, JOE has transformed itself into a land-rich, debt-free company. The company owns nearly 586,000 acres - 90% which is develop-able and 406,000 acres on the coast (waterfront). While Florida real estate is underwater now, the long-term economics of Florida make it very attractive to outsiders, especially baby boomers, as there is great weather, wonderful beaches and a favorable tax environment.

If you consider only the 406,000 acres on the Florida panhandle, the current market values each acre at just over $5900, and throwing in the other 180,000 acres for free. As a bonus, the new Panama airport is being built in the middle of JOE land. Today, Florida land might not seem valuable, but land isn't going anywhere during a recession, and over the next several years, Joe's value should start to crystallize. Only Tejon Ranch (NYSE: TRC) in California has similar dirt-cheap land assets and a debt-free balance sheet. (For further reading, see Can Real Estate Stabilize Your Portfolio?)

Entertainment on a Budget
While the era of conspicuous consummation may be long gone, there are many budget-friendly ways for consumers to continue to enjoy a night out without breaking the bank. This notion occurred to me when I visited an Olive Garden, which is owned by Darden Restaurants Inc (NYSE:DRI), and was informed of a 30 minute wait- on a Thursday.

Instead of trying to pick out individual restaurants, businesses like Yum! Brands (NYSE:YUM) are better bets. Yum operates brands like KFC, Pizza Hut, and Taco Bell. Like Yum, Darden also operates Longhorn Steakhouse, Red Lobster and the upscale Capital Grille. Such a broad portfolio gives these groups a bigger piece of the consumer's dining dollar.

Safe Return Thanks to Emerging Market
The golden egg for Yum! is its rapid growth in China. The company is a cash cow, having generated $500 to $750 million dollars in free cash flow per year over the past three years. The nearly-5% free cash flow yield along with the 2.2% dividend yield is not a bad starting point for investors looking for a safe stable return. (For further reading, see Spotting Cash Cows.)

Bottom Line
As consumers balance increased living priorities, little of each dollar is left over. It's better for investors to focus their investment selections on those businesses that offer consumers both the necessary essentials and budget-friendly selections. (For more, see Recession: What Does It Mean To Investors?)

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