With Americans slashing spending every which way they can, a somewhat eclectic group of stocks is taking a turn in the spotlight. Call them Frugalpalooza stocks.
Consumers are, for instance, eating in, holding on to their cars longer and cutting back on entertainment. That means companies that make pasta, sell replacement auto parts and let you stay home and watch a movie (no babysitter needed) are benefiting. So are discount retailers. And with the economy mired in recession and likely to remain that way for most of the rest of the year, stocks of those companies that help consumers rein in costs may still have room to run.
Netflix (symbol NFLX) is a conspicuous example of a business that is profiting from our disaffection with conspicuous consumption. The company, which mails DVDs to your home and delivers movies over the Internet via its new Roku device, has seen its market share jump from less than 6% in 2003 to 18% last year, says Ron Rowland, founder of AllStarInvestor.com, a Web-based investment newsletter, and chief investment officer of Capital Cities Asset Management. The formula for Netflix's popularity? Convenience and low price. Memberships start at a loyalty-inspiring $4.99 a month.
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The stock, which closed at $39.68 on March 27, has climbed a nifty 33% so far this year. Still, Rowland thinks the stock can go higher. "It's got plenty of upside potential since it fits into the whole theme of people cutting back on extravagances," says Rowland. He's dubbed a section on his InvestWithAnEdge.com Web site "Frugalpalooza".
In addition to watching movies on the small screen, consumers are doing dinner at home. So companies that sell pasta and other packaged foods, such as American Italian Pasta (AIPC) and General Mills (GIS), stand to benefit from the national belt-tightening (never mind that their products may lead to a different sort of belt-tightening). Shares of American Italian Pasta -- which makes brand names, such as Mueller's, as well as private-label products -- have surged 57% this year, to $35.15.
The stock of General Mills, which makes everything from Cheerios to Betty Crocker cake mixes, has been less stellar, sinking 19%, to $50.85, so far in 2009. Stephen Biggar, global director of equity research at Standard & Poor's, says he thinks both stocks can advance over the next few months. "The new chic of staying home will continue until we get a good employment number," he says.
When frugalistas do leave the house, they hunt for bargains. That's helped discounters such as Wal-Mart Stores (WMT), one of only two stocks in the Dow Jones industrial average that rose last year. A less-well-known beneficiary of the new shopping trend has been Family Dollar Stores (FDO). Family Dollar, which used to cater to lower-income Americans, has become popular among the middle-income set, thanks to the economic slowdown and an expanded line of merchandise, including food.
Unlike many other retailers, which are either cutting back or going out of business entirely, Family Dollar is expanding. From 2000 through 2008, the chain nearly doubled its store count, from nearly 3,700 to more than 6,600. In its 2009 fiscal year, which ends in August, it expects to add 125 more stores, says S&P. Since the year began, shares of Family Dollar have climbed 30%, to $33.63.
Car sales have fallen off a cliff. Instead of buying new vehicles, consumers are fixing up the ones sitting in their driveways. That's helped the stocks of companies that sell car parts to do-it-yourselfers, such as Advance Auto Parts (AAP) and O'Reilly Automotive (ORLY). Advance Auto is attractive because it focuses on commercial-parts distribution, the faster-growing, more-profitable side of the business. O'Reilly, meanwhile, is benefiting from its acquisition of CSK Auto last July. The purchase, which nearly doubled the size of the company, gave O'Reilly a crucial West Coast presence. Shares of O'Reilly have risen 13% this year, to $34.78, and Advance Auto has advanced 24%, to $41.80.
The dramatic slowdown in new-car purchases gives parts retailers a tail wind that will last 12 to 18 months, says Anthony Cristello, an analyst at BB&T Capital Markets.
With money tight and consumers less able to tap home equity than in the past, new-car sales in the U.S. are likely to remain depressed; Cristello predicts a level of 10 million a year or so, compared with 16 million to 17 million a few years ago. Today's dominant mindset, he says, is "What do I need today to get by?" That's a sentiment that resonates across the nation.
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