Some businesses did well during the Great Depression of the 1930s, including repair shops, bicycle shops and second-hand stores. During World War II, when consumer spending was sharply curtailed, everyone from small businesses to major corporations did well financially if they made products to aid in the war effort. In the 1970s, stagflation did not stop McDonald's (MCD) from experiencing considerable growth.
Remember: No matter how troubled the economy may be at a given time, some players always find ways to be winners. During the Great Recession, even though home builders and banks went through tough times -- and are still struggling -- some businesses flourished.
Today's winners include financing companies that cater to a lower-income clientele, such as short-term loan companies and pawnshops. This is due to the fact that the clientele for such businesses has suffered significant job losses and stagnant wages, and is in need of unconventional loans.
DFC Global (DLLR), otherwise known as Dollar Financial, is one name doing well in this market. The company provides such services as check cashing, payday lending and money wire transfers. It operates nearly 1,300 retail locations in North America and Europe, using such names as Money Mart, The Money Shop and Insta-Cheques.
An automated strategy that I use to choose stocks, which is based on the writings of Peter Lynch, shows that Dollar Financial is a good bet at this time. This strategy focuses on the P/E/G ratio, which is price-to-earnings relative to growth, and is a way to measure how much the investor is paying for growth. A P/E/G of 1.0 or less is acceptable, and below 0.5 is considered very strong. Dollar Financial is in this very strong category with a P/E/G of 0.48. Also in the company's favor: zero debt. I guess is not surprising given that this company's business is based on understanding debt and its costs.
Another company well positioned for today's economy is Cash America International (CSH), which operates about more than 1,000 pawnshops and cash advance locations operating under such names as Cash America Pawn, SuperPawn, Cash America Payday Advance and Cashland. The company does business in the U.S., Mexico, the U.K., Australia and Canada.
The automated strategy I modeled on the work of James P. O'Shaughnessy is positive on this stock. In Cash America's favor: a market cap of $1.25 billion, earnings per share (EPS) that has increased in each of the past five years, a price-to-sales ratio of just 0.86 (up to 1.5 is acceptable) and a relative strength of 73.
A third company in this general market is World Acceptance (WRLD), which is one of the largest, small-loan consumer finance companies in the U.S. and Mexico. It offers short-term small loans, medium-term loans, related credit insurance products and additional services from more than 1,000 offices in the U.S. and Mexico.
My Warren Buffett-based automated strategy favors World Acceptance because of the company's strong market position, its EPS, which has increased for each of the past 10 years, a return on equity of 18.9% during the past 10 years and solid free cash flow per share. Once a company has passed all of this strategy's financial hurdles, it is then analyzed in terms of what the investor's expected rate of return will likely be over the next 10 years. World Acceptance's projected rate of return is a desirable 17.6% annually over the coming decade. That's a solid return by any yardstick.
No matter how weak the economy, these firms will likely be among the winners.