A perfect storm of uncertainty in the global economy and a stronger dollar means these companies are likely to be big stock market winners in the next year.
The global economy remains uncertain.
Europe is up in arms, with many of the euro zone governments keeping a tight fiscal policy. The major emerging markets are facing deflation issues and China is slowing down. Then, we found over the weekend that Japan has slipped into recession again.
This makes international investing increasingly tough.
But one of the few bright spots for investors is the U.S. Unemployment in the U.S. is at its lowest point in six years and the dollar is gaining strength relative to the rest of the world’s currencies — with the dollar index at multi-year highs.
That’s why we’re focusing on stocks in the United States…but not just any U.S.-based stocks.
Major multinationals will be disadvantaged as the dollar remains strong.
The likes of Coca-Cola (NYSE: KO) and McDonald’s (NYSE: MCD) that generate a large portion of their revenues from outside the U.S. will have to convert their overseas profits at a higher rate as the dollar appreciates, which hurts earnings. Their goods also appear more expensive to foreign buyers when the dollar is strong.
Conversely, major U.S.-focused retailers (i.e. retailers that only have sales in the U.S.) that buy their inventory and goods from overseas gain an advantage as those goods continue to get cheaper and cheaper thanks to a strong dollar.
The other big tailwind for U.S. retailers is low gas prices. Gas prices have dropped 35 cents in the last 30 days alone. And it’s been said that for every penny decline in gas prices, that’s an extra $1 billion saved by the American consumer.
While saving $10 on a tank of gas won’t have a major impact on high-end retailers, such as Macy’s Inc. (NYSE:M) and Nordstrom Inc. (NYSE: JWN), it will have a major impact on some discount retailers.
The key thesis is that the U.S.-focused retailers that cater to budget-conscious consumers will be the biggest winners when it comes to your portfolio for the next year or so.
Here are the top three plays in today’s market, which is fraught with global weakness and a strong dollar:
No. 1: Target Corp. (NYSE: TGT)
Target is one of the two major department retailers in the U.S. But unlike Wal-Mart Stores (NYSE: WMT), which is a global retailer, Target’s primary focus is on the U.S. Target also pays a 3% dividend yield, compared to Wal-Mart’s 2.3%.
The problems from last year’s data breach are slowly disappearing in the rearview mirror and Target is regaining customer loyalty with its REDcard. Target should also continue distinguishing itself from Wal-Mart and other retailers this holiday season with its differentiated brands and fashion offerings. It’s also very encouraging that Target has become a one-stop shop with its rollout of consumables and grocery items in stores.
No. 2: Dollar General Corp. (NYSE: DG)
Dollar General has nearly three times the number of stores, over 11,500, that Wal-Mart has stores in the U.S. The beauty of Dollar General is that its stores are much smaller and easier to navigate than Wal-Mart’s large, sometimes cumbersome, layouts.
Even with the small size, Dollar General has managed to allocate square footage to consumables, which tend to be traffic generators and attract shoppers to the stores. And despite its already large store footprint, management has identified 14,000 sites for potentially opening future Dollar General stores over time.
One advantage is that Dollar General is well-positioned to tackle small, rural towns — markets in which it’s not economical for Wal-Mart to operate. Plus, with just $3 billion in debt, compared to its near-$20 billion market cap, Dollar General has the balance sheet to support that kind of store growth.
No. 3: Big Lots Inc. (NYSE: BIG)
Big Lots has over 1,500 discount stores spread out across the U.S. and Canada. It has fairly diverse product offerings, with sales across categories such as consumables, home goods, electronics and seasonal items.
Big Lots also has a relatively new CEO; David Campisi was hired in 2013. He’s bringing in fresh ideas to help reinvigorate this closeout retailer. This includes the company’s plans to exit the underperforming retail and wholesale distribution businesses in Canada, allowing it to focus solely on the U.S. Big Lots is also rolling out store freezers and coolers to offer more consumable items to help increase foot traffic.
Big Lots also stated paying a dividend a couple months ago. Its dividend yield is 1.4%. Its strong balance sheet, with more cash than debt, can support a higher dividend going forward.
Amidst the global uncertainty, a strengthening dollar and cheap energy, investors should be more focused on the U.S. market than ever. The three stocks above should be big winners this holiday season and impress investors with earnings growth and market share gains over the near term.
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