main street stock during recession

CCV is recommended by Australian Small-Cap Investigator - Main Street Stock that shielded the company against recession.


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Finding value on “Main Street”
But it’s not all fireworks and belly-dancing. At the
other end of the small cap market you will find a
totally different picture. This end of the market is
less volatile, but it doesn’t have to be less profitable.
When I talk about “Radioactive” stocks I’m really
talking about “growth” stocks. The other type of
proposition in the small cap market are small cap
“value” stocks. I call these “Main Street Stocks.”
These are typically small cap companies that
are already making a profit but which have been
dragged down with the rest of the market.
So, in a recession, when investors and consumers
are defensive, growth loses favour. Value rises.
That’s why, each month of 2009, you’ll read about
my favourite “Main Street Stocks.”
So, what do I look for in a “Main Street” stock?
Four things:
1) Has the small cap company been unfairly
beaten down?
2) Is it selling products and services that
Australians will buy?
3) Does it have a plan for growth that will make
the share price soar?
4) Is the stock paying dividend that will tide us
over while we wait for the capital gain?
The Pay-Day loan firm that’s cheering for
recession
When markets turn sour there is very often a rush to
find stocks that are “recession proof.” Usually, when
analysts on Sky Business channel and CNBC are
talking like that, then it is too late. The market has
already fallen.
Then they often make the mistake of looking at the
wrong end of the market – blue chip stocks. While
there’s nothing wrong with that, they are stocks
many investors already have in their portfolio.
The first Main Street stock that I’m going to mention
is a stock that will almost certainly not be in your
portfolio. It is a stock I believe could perform
well over the next year regardless of whether the
broader market goes up, down or sideways.
The stock in question is Cash Converters [ASX:
CCV]. In the old days it would have been called a
pawnshop. But today it is a business that offers two
distinct services:
First, it is the buyer and seller of second hand
goods. For many people it is a quick way to turn an
old television set, lawn mower or mobile phone into
ready cash. The alternative to using Cash Converters
is to take out a listing on eBay, Trading Post or the
classified ads in your local paper. Then you have to
wait for someone to call.
With Cash Converters, providing the item can be
resold, you can get the cash straight away.
The second part of the business is short-term
lending. We’ve all read the stories about the crisis in
debt markets recently. Well, that doesn’t seem to be
a problem for Cash Converters.
You see, Cash Converters specialise in an area of
the market the major lending institutions don’t
want to touch. I’m talking about the small personal
loan market. It’s the sort of loan where someone
needs only $500 to pay an unexpected bill. In most
cases the loans are only outstanding for a couple
of weeks. For banks, the small or micro loan market
isn’t worth the effort. But for Cash Converters it is a
perfect opportunity and a great money-spinner.
A quick look at the financials for the company will
show you why this makes the grade as a Main Street
Stock:
• Net profit of $15 million from revenue of $74
million. That’s a 20% margin. Anything above
10% is pretty good, so this is amazing
• A cash balance of $16 million, which is great in
any market, especially in one like this.
• And it increased its cash position while other
companies dig into reserves, adding an extra
$1.3 million to the bottom line.
On top of that, this company pays you to own the
stock. This year Cash Converters will pay $660 just
for buying $5,000 worth of its shares. That’s a yield
of 13% - or 8% above the inflation rate.
That’s why I’m so interested in this firm – but I
wanted to hear what the company had to say for
themselves. So, I picked up the phone and spoke to
Cash Converters’ Managing Director Peter Cummins
to get his view. This is what he had to say:
“It is true that our business will perform well
regardless of the economic downturn. Our
retail business generally improves as customers
seek out cheaper second-hand items to replace
expensive new products. We generally see more
customers looking for a short term cash loan to
pay an urgent bill.”
This stock ticks all the boxes for inclusion as a “Main
Street” stock.
In fact, I like it so much that I am also adding Cash
Converters to the ASI portfolio this month. The
dividend alone is enough to get me excited.
But let me say that recommending all three
focussed stocks isn’t something that will happen
every month. It just so happens that this month I like
all three of them so much that I’m prepared to add
them all to the portfolio.
You will need to consider which – if any, or maybe
all three! – of this months tips you are comfortable
investing in for yourself.
Action to Take: Buy Cash Converters [ASX: CCV].
Recent price $0.32.