Low Prices, Weak Sentiment Means Strong Stocks

By Kristina Zucchi, CFA | July 21, 2010 AAA

Core consumer prices fell for the third month in a row to a level not seen in 44 years. Despite these low price levels, consumer sentiment remains weak. Taken together, these data points seem conflicting. However, there are companies that should be the beneficiaries of weak confidence and low prices. Such companies have been and should continue to see a boost in sales and translate into strong relative stock performance. The S&P 500 has returned a negative 3.5% year to date, but these stocks have held in since the beginning of the year.

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Everyday Bargains
In this environment, many consumers are looking for bargains and ways to make their dollars stretch. Weak confidence means that consumers are unsure about their future and want to save or decrease spending as much as possible.

Dollar General (NYSE:DG) is a discount seller of every day merchandise. This company provides the basic necessities at discount prices. The stock has appreciated almost 32% since the end of 2009 and has moved from $23/share at the beginning of the year to the current price $29/share. The premise that foot traffic will continue to be strong during this uncertain economic environment keeps this stock performing better than the market. (For related reading, see Family Dollar Posts Strong Earnings, Guidance Panned.)

Cheap Fashion
The fashionistas of the world still want to look good, but at cheaper prices. TJX Companies (NYSE:TJX) is more commonly known as TJ Maxx, Marshalls and Home Goods, among other brands. This company offers fashionable apparel and home furnishings at discount prices. The stock has been fairly steady in 2010 and has appreciated over 130% off the lowest levels seen in 2008.

"Sin" Eases Worries
The so-called "sin" stocks - tobacco and beer - usually have good returns during difficult economic times. During this recession, these stocks have held up quite well, keeping the "sin" investment theory alive.

Anheuser-Busch Inbev (NYSE:BUD) has perhaps the most well known brand of beer worldwide. BUD has been a steady stock in 2010 and appreciated 46% since third quarter of 2009. Philip Morris International (NYSE:PM) manufactures tobacco products and is most known for its Marlboro brand cigarettes. PM has similarly been very steady in both 2009 and 2010, recovering from the global slowdown to within 10% of its former stock price.

The Bottom Line
While the economy tries to figure out which direction it is headed, these companies should continue to benefit from the uncertainty and weather the storm better than the market. As such, investments in these companies should return more than the market.

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