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I’m Cheap! I’m Misunderstood! Come BUY Me! (FCFS/DDS)

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.

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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.

The Other Side of the Cheap Goods Coin

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.

Give us some numbers, Matty!

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’re

We, of course, will be monitoring the trade on a daily basis.

Many happy returns,

Matt McAbby

4 responses to “I’m Cheap! I’m Misunderstood! Come BUY Me! (FCFS/DDS)”

  1. Brad says:

    What about a trade on the oil fiasco? Rebound ideas or even based on likely tarriffs imposed by Trump to protect domestic energy? Some sort of action coming soon methinks. $$$

    The tanker stocks are finally moving some like Eurn.

    I was at a Dollar General yesterday and the traffic was meh. HD and Lowes are packed in the South.

  2. Matt McAbby says:

    Big bad Brad!
    What’s a southern gentleman like you doing in a place like this!? 😜
    Good to hear from you.
    Oil will have its turn, brother B., and there will be a bounce, for sure. Just couldn’t be certain it was ripe for this week. Gonna give it a few more days to mature.
    As to protecting the domestic producers, can’t see it. Impossible situation. How would the man do it? Without any demand, it’s a flush-yer-money operation more wasteful than the Coronavirus Aid, Relief, and Economic Security Act.
    G-d help us all…
    Got your news on the traffic through the big national retailers, but what’s your take on Dillard’s? People still venture that place? Quality merchandise, maybe, but any customers?
    Love to get your thoughts.
    Keep in touch, Bradley.
    Matt

    • Brad Brodie says:

      I can say that in this area Dillards would be considered to sell top of the line merchandise. In South Carolina and Georgia their department stores are still closed and have been for a month. (When they open I will stop by and see what is going on) Interestingly, the lack of school has caused the kids to not get sick and others not to get sick with the normal flu/viruses/colds, etc. No one wants to step foot in a Walgreens/CVS or the hospital. Foot Traffic dead at Walgreens/CVS. From my view the rally is enormously overdone but if they keep shoveling $$ who knows. Should be interesting earnings reports in the coming months. Southern woman love $$$ like the rest of them … they can’t get enough!

  3. Matt McAbby says:

    Thanks, Brad.
    Very curious to know where the Dillard’s train is headed. Doesn’t look good from our perch.
    Regarding money shovelling; it’s great for the short term — you’re right. But a come-uppance is at hand.
    You and your southern women should take cover, brother! And get ready with some shorts!
    All the best,
    Matty

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