5 Stocks for an Economy in the ‘Weeds’

07/14/2011 10:15 am EST

Focus: STOCKS

Igor Greenwald

Chief Investment Strategist, MLP Profits

With many Americans downwardly mobile, just like fictional Showtime drug dealer Nancy Botwin, the stocks of dollar stores and payday lenders have been soaring, writes MoneyShow.com senior editor Igor Greenwald.

It’s hard to believe that Weeds, the popular and critically acclaimed Showtime drama about a renegade family led by a pot-dealing mom, is now in its seventh season.

Few series last that long, and fewer still are social satires so grounded in the economic moment. No surprises, then, that the story arc of Weeds over the last six years is in many ways the script America has followed.

The show premiered in 2005, with Mary-Louise Parker’s recently widowed and hopelessly risk-addicted soccer mom taking up marijuana dealing in a ritzy subdivision. Seemingly everyone in Agrestic was on the make, and loaded with the disposable income to buy drugs.

“I’m dealing to maintain my lifestyle,” Nancy Botwin announced, while viewers were burning through home-equity lines and credit cards to maintain theirs.

Agrestic’s brazenly crooked civic leaders anticipated the revelations about widespread municipal corruption in Bell, California by five years.

In the final episode of the third season, in late 2007—with the S&P 500 six weeks past its record high—Nancy torched her Agrestic house in a prescient bit of real-estate forecasting. A little more than a year later, prices in the Los Angeles area would be down 43% from their mid-2007 peak.

For the next two years, as America struggled with recession and growing unemployment, the Botwins too lived increasingly tenuous lives. From 2008 through 2010, more than 8 million US properties went into foreclosure, according to Realtytrac.

By last year’s Season 6, the family had hit the road as fugitives—and though the people they encountered in seedy motels and off-the-grid trailer parks were not fleeing a Mexican drug cartel, they too bore economic scars torn from the headlines.

By now, the formerly affluent suburban housewife has been transformed into an ex-con schemer, her wardrobe evidently bought at dollar stores. Which is entirely unrealistic, because these days, a growing proportion of dollar-store customers can’t afford frills like clothing any more.

The current season, which may or may not be the show’s last, features the Botwins picking up the pieces in New York. And though the action has supposedly jumped three years ahead, the economy bears the unmistakable hallmarks of the recent “soft patch.”

“I tried to unload this place, but no one’s buying,” says the failed nightclub owner renting an unfinished loft he bought in better times. “…I am going upstate and living in my brother’s attic until the market turns.”

Millions of Americans feel his pain.

Signs of a nationwide struggle are there for the gleaning. Organized grocery thefts in Arizona are reportedly an “epidemic.” Tide detergent is under lockdown in New York. [As well as individual wine bottles at a CVS near MoneyShow’s tony Florida headquarters—Editor.]

One reason Netflix (NFLX) has faced such a storm of protests after raising the price of its DVDs-and-streaming plan is that many of its customers are refugees from cable, who are extremely price-sensitive and already feel put upon.

Netflix is just one of many “Nancy Botwin stocks” capitalizing on the needs of the downwardly mobile and receiving star treatment from investors. Aaron’s (AAN), recommended in a recent column, is another.

Despite the recent sales concerns, shares of dollar store chains like Dollar Tree (DLTR) and Family Dollar (FDO) are still living it up.

But perhaps no industry has capitalized on the struggles of the real-world Americans as successfully as providers of payday loans. They’re not merely surviving the high unemployment and periodic regulation attempts by various US states—they’re thriving, as credit-challenged customers gladly pay 20% or more per month to make it to the next paycheck. [Sometimes much more than that—Editor.]

I recommended shares of EZCorp (EZPW) in early 2007, in the neighborhood of $15. They’re now near $38.

Despite the surge, the stock is still selling at just ten times trailing cash flow, and 15 times current-year earnings—even as EZCorp’s sales are up 20% and earnings 34% year-over-year. These are better odds than Nancy Botwin has obtained on any of her recent drug deals.

There are many Botwins out there, easy marks for EZCorp’s kind. Like Nancy, the US economy is in the halfway house, still addicted to risk and the lure of easy money.

There’s even a bill pending in Congress that would let states legalize marijuana to make ends meet. That’s what happens when middle-class dreams go up in smoke.

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