“Free Money — the Ultimate Recession Stock”

by Travis Johnson, Stock Gumshoe | July 24, 2008 11:10 am

I mentioned yesterday[1] that I would be spending a little time running through the teaser stocks in Ann Sosnowski[2]’s latest teaser ad for her Safe Haven Investor[3] 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[4] 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[5] 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[6], 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?

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