“Free Money — the Ultimate Recession Stock”

I mentioned yesterday that I would be spending a little time running through the teaser stocks in Ann Sosnowski’s latest teaser ad for her Safe Haven Investor newsletter … so without further ado, here we go!

This one is called the “Ultimate Recession Stock” in the ad, and whether or not you think we’re in a recession, or about to enter one, I think we can certainly agree that economic growth is at least fairly tepid at the moment … and it’s not going to change our lives much one way or the other when NBER tells us for sure whether it was a recession when they look back in a year or so.

And when a recession hits, the temptation is to shy away from most consumer-related stocks (since they’ll be broke), and focus on stocks of either consumer staples companies or companies that help consumers save money. So maybe Wal Mart more than Target, if we’re in a world where price sensitivity is everything.

This teased stock hits that general feeling right between the eyes, according to Sosnowski …

“If you were going to own one stock for the next 12-18 months, this would be the one.”

She compares it to Hansen Natural Food in calling it a “ground floor opportunity that could hand early investors a tremendous gain” — certainly we’ve heard that promise before, that someone has found the “next Hansen,” though in this case it’s a company that’s not even remotely similar in terms of the product they sell.

And then she thankfully goes into a few nice little clues for us …

“The company’s mission is to provide an exciting assortment of necessary items … all for 99 cents or less! They do a heck of a job, because in 2006 sales were over $1 billion.

“The company makes roughly $4.3 million per store; and with plans to expand to over 2,000 stores in the next five years, their upside potential is enormous

“And here’s the important thing for you to know: this stock has a history of performing during recessions. In fact, back in the market slide of 2000-2003, the stock delivered a 195% gain.”

She also — since this is all about following those 13F filings from the big name investors — tells us about a few of the institutional investors and money managers who have placed bets on the company …

“… one of Wall Street’s top gurus, David Akre, has been buying this company’s stock like crazy. As of January 2008, he was holding 9.39 million shares.

“Trivium Capital has also taken a four-million share position in this stock. And PrimeCap Management has gobbled up five million shares.”

And apparently there has been some insider buying this year, too.

So what do we have here? That’s a delightully deep and wide stream of clues for the Thinkolator, so I can wade right in and tell you that this company is certainly …

99 Cent Stores (NDN)

You’ve probably heard of these guys, or one of their dollar store competitors. They claim to be the originator of the concept, and they currently have about 250 stores, almost all in the West (California, Nevada, etc.).

And those relatively well known investors did have, at the end of March, significant positions in NDN — though not David Akre, I’m pretty sure she meant Chuck Akre, who runs Akre Capital, which did own 9.39 million shares in January (as of March that’s up slightly to 9.45 million). PrimeCap and Trivium do have significant holdings, and little Enso Capital has almost 15% of it’s portfolio in this company. It’s also a major holding of the FBR Focus fund (which has been average or below average in recent years). PrimeCap is a well-respected manager with some very good and popular Vanguard funds under management, but they also run their own funds (this stock doesn’t appear to be a big holding of their Vanguard funds).

And 99 cent stores did have that nice return, as teased, from 2000 to 2002 — but it got clobbered during that period, too. NDN went from $15 to $30 in 2000, then fell back to $10 when the Nasdaq collapsed and went back up to $30 during that three year period. Phew. Wonder how many of those folks held on after it fell to $10?

Oh, and the shares have been moving down ever since it got up to about $35 in 2003 — though they did have some rallies, the stock now trades for about $7. So I guess you could say that — going by this one recessionary period, at least — it has done better during weak economic conditions than during strong growth periods. To be fair, though, that 2001 recession was all about collapsing business spending, the consumer wasn’t nearly as crushed as he has been over this past year.

Most of those institutional investors are focused on value, sometimes “deep value”, so they may well have more patience than you do … I have no idea if this one will quadruple in the next couple years as Ann suggests, and it’s not cheap on current earnings (forward PE is about 25, trailing PE is pretty rough, in the hundreds).

Perhaps more importantly, what on earth do you do with a business model that requires you to sell at a fixed price, when the value of that 99 cents falls surely and steadily, and the price of your incoming inventory consistently climbs? That seems like an awful squeeze to be in, though I guess they can just buy cheaper and cheaper items, or smaller and smaller packages, but eventually it’s going to not work so well — this company’s first store opened in 1982, when a gallon of gasoline cost something like $1.40. And if they had just kept pace with the Consumer Price Index measure of inflation, they’d have to call the place the “$2.21 store.” Not quite as catchy.

I wouldn’t be surprised if 99 Cents stores had some really nice sales increases, and maybe their strong position in California will be good for them if that huge economy continues to teeter … but I would be surprised if they are able to expand their margins or become more profitable unless we suddenly enter a deflationary era, or at least squelch inflation. I’ve been around for a lot less time than Chuck Akre, though, and made a lot less money, so there could easily be something I’m not seeing. What do you think?

The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.

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1. NDN starts out in an Unfavored sector – Retailing. Add the fact that there are ZERO out of 5 technical attributes positive and this turns into a real DOG.
   http://stockcharts.com/def/servlet/SC.pnf?c=ndn,P
   If I called you up and asked you to buy this after seeing the chart, would you bite? If so, please whisper to me. I have land in Florida that is above water two times a day.

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   Posted by farley 5 | July 24, 2008, 3:59 pm

2. the pe is 169.50 and it has no yield and the chart says it goes to zero. yeah, great buy

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   Posted by olenska | July 25, 2008, 9:33 am

3. olenska – “About that Real Estate in Florida…..”

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   Posted by farley 5 | July 25, 2008, 9:46 am

4. Is there any Stock out there that will GUARANTEE my Capital(AAA) and Bank Guarantee a minimum Coupon annual income say (2%) while also giving me my Ordinary Stock???

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   StockGumshoe Reply:
   July 25th, 2008 at 10:55 am

   Stocks/Equity investments by definition are “no guarantee” — your capital is tied to the success of the company, and even the greatest companies fail or see their stocks drop significantly sometimes. There are some AAA-rated companies, but not many, and AAA doesn’t mean your equity investment is guaranteed, it just means that the ratings agencies are certain that the company will not default on its debt. I think GE is still AAA rated, for example (I haven’t checked for sure), and has a nice yield above 4%, but it’s certainly possible to lose capital when you trade GE stock, as folks have learned in the last couple years.

   I’d be careful about putting too much faith in ratings when doing equity investments, or even when looking at debt — remember, the collapse in the debt markets was largely due to stuff that was finagled to make it highly rated (not AAA, but still investment grade). And it wasn’t that long ago that AIG was AAA rated, just as Berkshire Hathaway still is. It’s pretty hard to find any guaranteed investments at this point that offer much of a real yield at all (ie, most treasury bonds and CDs provide income that will fail to keep up with current inflation rates).

   Other companies that I think have been AAA rated at least in the last year (don’t know if they are today) are Pfizer, Johnson & Johnson, Exxon Mobil, Toyota and UPS. All have seen their equity value move significantly in the last 12 months, the lesson really is that safety and most ratings of this type are all about debt worthiness, not about safe or stable stock prices. If you want guaranteed capital (and you still have to think about what you mean by “guaranteed”), you need to lend money to strong companies or governments that you are certain will not default, not invest in their business. Or one could always try to hedge this issue by buying convertible bonds that have a right to some sort of appreciation if the stock does well, but investing in these is extremely difficult for individuals — and this kind of debt is not generally issued by the most credit-worthy companies and is usually considered either junior debt or senior equity, not the first to be paid back in a bankruptcy. There are many mutual funds that can do this kind of investing for you if you like, or you can invest in the somewhat similar convertible preferreds or other preferred stock, many of which are much more complext than standard equity shares.

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   Donato Reply:
   July 25th, 2008 at 1:45 pm

   Anthony . . .
   If you want your capital guaranteed, and are happy with a yield of 2%, why does it have to be an “ordinary stock”? With these parameters, I can only see one possible “end game” that you are looking for . . .

   You want a stock that carries the guarantee it will never decrease, but also guarantees a minimum growth of 2% annually. Sane people do not enter the stock market (buy individual stocks) with expectations so low. What you have actually described is almost an annuity. You can get CD’s and money market accounts that pay 4 – 5% annually, and are government insured. Just be sure to spread anything over 100K around.

   There are annuities available that pay a minimum of 2 – 5% annually, with the potential of earning more when the market is doing well, but are then capped at something like 12 – 17% annually on the upside. Some annuities available today are nothing like the annuities of yesterday. The only problem in your case might be the potential to liquidate quickly.

   If you really want to be in the market yourself, and not rely on another’s management expertise, then you have to assume risk. That degree of risk is up to you. Simply put, the easiest way to make money in the market is to buy low and sell high. That being said, which portion of the market is currently taking a beating . . .

   Financials. Buy low and sell high. The financial indexes are currently down. Way down. Technically, I don’t think you can invest directly in an index, but there are funds that are managed to move the same as the indexes.

   I think we are approaching the bottom. There is still much volatility ahead, but I’m starting to load up on an ETF (exchange traded fund) that actually moves at twice the rate of a financial index. Since I don’t have a crystal ball, I will make several purchases during the course of the next year. If it drops below 10, I’ll probably just spend my total sum on it. That fund is UYG. I believe in the American economy, and that it will recover. If you don’t, and you think the financials are doomed forever, then buy SKF (I think is the ticker). SKF moves at twice the inverse of a financial index.

   Another option might be the Zweig Total Return Fund (ZTR). I do not own ZTR. The objective of the fund is to return 10% annual yield. And I think, but am not positive, that when I first ran across this fund, I saw somewhere that if the yield falls below 10%, then some of yield is structured to give you tax advantages.

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   Posted by Anthony | July 25, 2008, 10:28 am

5. Hi Travis -
   Can you look into Dave Denning’s The Daily Reckoning from Australia and give me your opinion on their “Black Leaf Project”. I believe that they are pushing Linc Energy (LNC.ax, LNCGY.pk or LNCYF.pk). Thanks
   -
   http://www.portphillippublishing.com.au/research/asi/0806.cfm?source=e9aaj709

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   StockGumshoe Reply:
   July 25th, 2008 at 10:59 am

   I’ve been meaning to have a look at this, thanks for the head start.

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   Allblack Reply:
   July 26th, 2008 at 6:52 pm

   Hi Gumshoe & Gumshoers,

   The company listed is LINC Energy, listed on the Australian Stock exchange, there are some threads that maybe worth a look.http://www.hotcopper.com.au/search_do.asp
   Current price is AUD$3.26, it dropped AUD .51 cents on Friday 25th July.
   ASX Code: LNC

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   Posted by RICH | July 25, 2008, 10:54 am

6. http://finance.yahoo.com/q/ta?s=BIG&t=1y&l=on&z=m&q=l&p=&a=&c=ndn

   In this low priced industry, Big Lots is less constrained by the prices that they can sell their wares for, & it really paid off since 04/08. Take this same comp back 2, 3, 5 yrs. & again you’ll see that Big Lots has the better strategy. http://finance.yahoo.com/q/ta?s=BIG&t=5y&l=on&z=m&q=l&p=&a=&c=ndn

   I don’t know Ms. Sosnowski’s work, but the departure between these two firms is eye-opening if making money is the object, IMHO!

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   Posted by SageNot | July 25, 2008, 11:52 am

7. I look at the difference in the market cap, NDN vs BIG, and to me, it’s a no brainer, even with BIG being close to a 52 wk high!,,, just my two cents worth. Thanks, SageNot,,, you’ve always had good comments!

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   Posted by EYOUNG | July 25, 2008, 1:20 pm

8. Gumshoe–I enjoy your humorous comments and your explanations of copywriter’s glowing words. Ambrian Capital has gone down considerably since you wrote about it. What do you think of it now?

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   Posted by diana c | July 25, 2008, 8:04 pm

9. Another stock in the same category as NDN and BIG is Fred’s FRED. I’ve shopped at Fred’s and enjoyed it. Seems to be well run and has a variety of inexpensive merchandise. An alternative to Walmart, Costco, Sam’s. You can get in and out much quicker.

   Chart seems ok. Caution: it’s a Toby Smith pick.

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   Posted by asafp | July 26, 2008, 9:14 pm