Amid high earnings multiples for many stocks and indexes near record highs, some investors are starting to worry about an impending crash. While stocks recovered quickly from the sell-off in early 2020, a lot of stocks took years to come back after the 2000 dot-com bubble and the 2007-09 financial crisis.
Nonetheless, even in more challenging times, many stocks can continue to prosper amid market sell-offs, particularly those that tend to serve more budget-conscious customers. Investors looking for companies like this among retail stocks should consider Amazon (NASDAQ: AMZN), BJ’s Wholesale (NYSE: BJ), and Dollar Tree (NASDAQ: DLTR). Let’s find out a bit more about these three stocks.
Perhaps no stock is better suited to endure a stock market crash than e-commerce giant Amazon. With its wide array of goods, it should remain a convenient choice for consumer staples at affordable prices.
Moreover, the cloud computing industry it created has driven massive growth, and Grand View Research predicts a 19% compound annual growth rate for that industry through 2028. Grand View valued the industry at $275 billion in 2020, and with Amazon Web Services (AWS) claiming a 32% market share according to ParkMyCloud, a market disruption will likely not stop the stock.
For the first six months of 2021, revenue of just under $222 billion represented growth of 35% compared with the first two quarters of 2020. Both its retail and AWS divisions experienced 35% revenue growth.
Net income for the first two quarters of 2021 came in at $15.9 billion, 104% more than in the same period in 2020. Slower growth in expenses and higher investment income boosted profits. Meanwhile, AWS accounted for the majority of earnings despite making up only 13% of net sales.
The company forecasts net sales growth of only 10% to 16% for the upcoming quarter as consumers switch back to more offline shopping. Nonetheless, a stagnant stock price has taken the stock’s P/E ratio to about 58, its lowest point in more than 10 years. Moreover, with Amazon in lines of business that prosper in any economy, a slowdown would likely just be a temporary blip on an otherwise-robust growth story.
2. BJ’s Wholesale
If the last downturn serves as an indication, investors might want to consider BJ’s. The regional warehouse retailer struggled a bit until COVID-19 drew in larger crowds, allowing it to reduce debt and invest more in its business.
BJ’s stands out mainly for its grocery offerings, providing the bulk discounts typical of a warehouse retailer but in smaller portion sizes than those offered at Costco Wholesale or Walmart‘s Sam’s Club. It also focuses heavily on product assortment and continually refreshed merchandise offerings to hold the interest of shoppers.
Admittedly, growth has slowed down for the company as the nation has emerged from the pandemic. Revenue of $8 billion for the first two quarters of 2021 is only 4% higher than in the same period in 2020. And net income fell 5% to $193 million during that period, brought about mainly by a 5% increase in the cost of sales.
Free cash flow during the first six months of 2021 came in at $431 million, down significantly from the $655 million during the same period in 2020. Still, that remains a vast improvement from the $127 million generated in the first half of 2019. The improved cash flows have helped reduce net debt to $705 million, down from over $1.7 billion two years ago. This has freed BJ’s to fund more store expansion, which should, in turn, increase revenue and earnings.
These improved financials helped the stock price rise 22% over the last year. And even after the increase, the P/E ratio stands at just under 19, well below Costco and Walmart, which both maintain P/E ratios of 42. Between its current multiple and its strong sales in tougher times, BJ’s should weather a crash better than most retailers.
3. Dollar Tree
Dollar Tree may seem like an obvious choice for a post-crash stock given its modest price points. But it’s struggled in recent years for reasons outside of the broader economy or its rivalry with Dollar General. Family Dollar, which Dollar Tree acquired in 2015, differed from Dollar Tree because it did not tie itself as closely to the $1 maximum price point, and has proven hard to integrate. Moreover, Family Dollar struggled as an independent company and did not improve immediately after Dollar Tree acquired the chain.
However, the company remodeled some Family Dollar stores, closed others, and rebranded a few locations under the Dollar Tree name. Thanks to those efforts, Family Dollar has begun to outperform Dollar Tree.
Now worries about inflation and supply chain issues have moved to the forefront. Congestion in U.S. and Chinese ports and labor issues related to COVID-19 have delayed shipments.
Despite these challenges, total revenue for the first six months of the year came in at $12.8 billion, 2% higher than the revenue reported in the first half of 2020. And even with that modest increase, net income rose 29% during that time to $657 million as the company reduced operating expenses by 2%. Interest costs also dropped by 12% since the company paid off the current portion of long-term debt in an earlier quarter.
However, the aforementioned worries about the global supply chain and inflation led the company to forecast between $26.2 billion and $26.4 billion in net sales for 2021. Such concerns led to a 12% drop in the stock price. Consequently, Dollar Tree’s stock price has fallen 9% for the year.
Nonetheless, the drop has taken the stock’s P/E ratio to 15. This is its lowest point since early 2019, and well below the 21 earnings multiple of Dollar General.
Moreover, CEO Michael Witynski said on the Q2 2021 earnings call that he expected the supply chain to improve by 2023 when new ships come online. This likely means that if a market crash weighs on investor income, Dollar Tree’s low-cost products could regain their appeal and bring shoppers back to its stores.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.