Posted on April 23, 2020
In the corona world in which we now live, hoarding, masking, ratting out your neighbors, and saving your resources for a rainy day decade have become the norm.
And one way folks are building their cash pile is by shopping at discount stores.
Dollar General is the largest dollar store in the United States, and one of the world’s largest discount chains by revenue. They’re making great money these days, but their stock is anything but a buy.
Take a quick look at the monthly chart for DG for a good illustration of what an overbought stock looks like –
After an extended stay in the monthly overbought realm last summer (in green), DG has now returned to those ethereal spheres.
And that don’t bode well.
We offer the above to illustrate that regardless how rational a trade may appear (i.e., pandemic >> no work >> no money >> people saving >> more people shopping at dollar stores >> ergo… invest in dollar stores!), mistakes can still be made.
If everyone is now in on Dollar General, it’s got nowhere to go but down.
We believe the future very much belongs to ‘cheap goods’ outlets (at least to those who can compete), but even more to pawn shops. And that will increasingly become the case as the remaining big retail outlets follow Amazon and move to an online ordering and delivery model.
Pawn shops will become the go-to bricks and mortar outlet for those seeking inexpensive items and – as always – looking for short term loans using their valuables as collateral.
The pawn shop business model is therefore perfect for a coronavirus lockdown future – and all the more so because it fits universally with the criteria of an “essential service”.
The company we’re looking at today is First Cash Financial (NASDAQ:FCFS), the largest player in the field, with nearly three thousand stores across the U.S. and Latin America, almost all of them obtained via an ongoing and very aggressive acquisitions spree.
As with all pawn shops, customers get temporary loans for books, jewelry, appliances and whatever else they’re ready to offload for immediate cash today.
FCFS generated just shy of $2 billion in revenues in 2019 via its loans (that carry a steep 12% monthly rate of interest) and the sale of goods abandoned as collateral.
As noted, the company has moved very aggressively in Mexico and Central America of late and sees great opportunity for growth there.
And so do we.
FCFS currently trades with an earnings multiple of 17.7, offers an annual yield of 1.59% and sells at 2.14x book value. Reasonable numbers for a market like this and for a company with a very strong growth trajectory.
But we’re not playing it straight.
We, of course, will be monitoring the trade on a daily basis.
Many happy returns,