So I'm reading two pieces in a row, an excellent thesis on Dollar Tree (DLTR) by Matt Boss, the acknowledged leader in retail right now over at JP Morgan (JPM) , and a well-reasoned tome about how Darden Restaurants (DRI) has got the scale and the management to dominate the slow casual dining category. OK that's my name for it, but how can you call it anything but when Olive Garden is so darned jammed?
I like everything I read. Dollar Tree, like its cousin Dollar General (DG) , has far less China exposure than one would believe and therefore is not subject to the margin squeeze everyone keeps fretting about come September 1. The tariffs are manageable.
We can try to craft a thesis for the coming woes of Darden, whether it be the never-ending dishes or the labor scarcity or the price of chicken or beef -- think the 481 Longhorn Steakhouses.
But if we have a slowdown, the labor shortage will cause a surfeit of workers while the paychecks won't necessarily go down for the American consumer. If China truly shuts down all American agriculture, how could the cost of goods sold from foodstuff do anything but go down. Meanwhile the cost of gasoline is about to plummet.
Dollar Tree? It's where you go in a slowdown.
But then I go watch the news and it looks like an invasion of troops from China's People's Liberation Army (PLA) will soon be in Hong Kong. There are trillions of dollars in debt around the globe with negative yields, Europe seems headed back into recession and the trade war between China and the U.S. seems hellbent to heat up.
So, I say, don't kid yourself. Sure Dollar Tree and Darden are great companies, but their stocks, while not all that cheap, are members of the S&P -- as we have become an indexed society of investors -- so therefore they can't buck the pull of lower rates.
But at the same time, I can't get it into my head about how a slowdown draws people to Dollar Tree like a magnet and the new, clean stores, with their national brands, have never been better. The closing or remodeling of the weaker Family Dollar Stores that Dollar Tree is revamping post the merger with that ne'erdowell chain continues apace with terrific results. Buy on S&P-related weakness?
Darden yields almost 3% and it is well-covered by cash flow. The stock of Darden is about 19x earnings; Dollar Tree clocks in at 17x earnings. The future seems brighter than the past.
However, why can't we just accept that the indexed society will pay 17x earnings for Darden's stock and 15x earnings for Dollar Tree, as the pulldown from assets' negative stock prices on fear of recession knocks down the good -- these two -- from the bad.
Fear can do that. I saw it happen in 1998, the fear of the system collapsing. You had one big precipitating event -- Long Term Capital's demise -- and you had no idea how low things could go until the Fed cut rates in an emergency meeting.
So what do you do?
I think you can own these two stocks if the coast clears, but why add now if you know that prices are coming down -- even if they shouldn't? After all, the biggest fear is lower yields from U.S. Treasuries, which only makes the Darden yield look like a conservative investment and the cheapest retailer in town a magnet for customers.
Can you invest in a fearful time? Or do you wait to commit new funds. I think you have to wait until things play out to commit new money. And that's' our plan for Action Alerts Plus, too.
Random musings: Don't forget the club call this Wednesday. These are attended by thousands of people. Shouldn't you be one of them?
