All-Weather Trio: Walmart, Dollar General and Grocery Outlet

01/31/2020 5:00 am EST

Focus: CONSUMER

Jim Powell

Principal Analyst, Global Changes & Opportunities Report

One of the most powerful emotions that motivates investors is the fear of missing out (FOMO) of a profitable rally, explains Jim Powell, editor of Global Changes & Opportunities Report.

When FOMO takes control, nothing will stop it — at least for awhile. Poor market fundamentals, a weakening economy, international threats, indicators of a coming recession, and so on will be ignored during a buying frenzy.

Today’s FOMO rally is happening across almost all asset classes — which is one of the reasons that I know it won’t last. Because many asset values oppose each other — such as gold prices vs. the stock market — when everything is going up at the same time, you know something is amiss.

At some point, the negative indicators will demand attention and the investment mood will change quickly — sometimes in just a few hours. When that happens, a fear of big losses — that is even a more powerful market emotion than FOMO — will take over and the market will drop abruptly.

I’ve seen it happen several times during my long career — most recently in 2008-2009 when the financial service and housing booms ended. Do you remember that elevator plunge? Market reversals are not much fun.

When the economic outlook is uncertain, all-weather stocks look especially attractive. Several of ours appear to be heading for additional growth in 2020.

Walmart (WMT) is at the top of my all-weather buy list for 2020. The company is making great progress with its online sales program that reminds me of Amazon (AMZN) several years ago.

However, unlike Amazon that has branched out into nearly every type of product, Walmart is emphasizing the products that it sells in its brick and mortar stores.

I also think Walmart will make its new healthcare centers a big success. Healthcare has been ripe for competition for decades, but nobody had the geographic breadth or the financial muscle to step into the ring. Walmart has both.

Dollar General (DG) should also have a good 2020 – especially towards the end of the year when I think the economy will soften and household incomes will begin to pinch.

Dollar General benefits from being quick to respond to its customer’s needs. The company has also reduced its reliance on goods from China that are subject to tariff increases. Customers who want more convenience — and usually lower prices — than they can get at Walmart, will often shop at Dollar General.

Grocery Outlet (GO) is another deep discount chain that should prosper for the same reasons that Dollar General should do well. The company has over 300 discount grocery stores across the nation and over 1.5 million regular shoppers.

Grocery Outlet specializes in name brands that it often purchases in bulk from producers that changed their packaging and don’t want the old styles in mainline supermarkets.

Producers can also have surplus inventory that they wish to sell. In addition, product overruns are common. For those and other reasons, Grocery Outlet can buy the products at significant discounts and pass the savings on to their customers.

Grocery Outlet is doing better than its stock chart would suggest. The price is down from its recent high primarily because the company sold a large amount of stock recently – which diluted the shares of existing investors. These problems are common and usually work out within a few month.

More importantly, the company reported an adjusted 3rd quarter profit above Wall Street expectations. Earnings were 13 cents a share vs. 11 cents for the same period a year earlier. As with Dollar General, I think Grocery Outlet will attract many more customers as the year progresses.

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