Uncle Sam Buys Guns and Butter and Investors Hopefully Buy Winners
Meryl is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investment decisions focus on many criteria, including the state of the economy. Stocks rise with a vibrant, expanding economy and fall when the economy contracts. Investing with these trends in mind minimizes portfolio volatility and increases wealth, or at the very least minimizes losses.
Over 40 years ago we fought a war in Vietnam. The country’s economy was robust and expanding in the mid-1960s. President Johnson thought the country could support the financial burdens of both war and increased domestic spending. He engineered a series of tax cuts in 1964 and 1965. But the economy could not sustain expenditures on both butter (social spending of the Great Society) and guns (defense spending of the Vietnam War). The result was punishing inflation lasting years.
Fast forward to the twenty-first century. President Bush also believed the economy could support both guns and butter. He lowered taxes and increased spending. The economy sputtered, revenue declined, additional events created housing and financial disasters, and we plunged into the worst economic crisis since the 1930’s Depression.
The government, a.k.a. Uncle Sam, had enormous bills to pay and less money to pay them with. So Uncle Sam did what many of us do when faced with a financial shortfall – borrow money. And our uncle continued to borrow. (Try asking your bank for a credit line increase, immediately max out your limit and go back and ask for more. How long can you get away with that!? Uncle Sam has gotten away with it for years.) Eventually the time comes when monthly payments eat up so much money there is little left for anything else. That is Uncle Sam’s predicament.
It took years to get into the current fiscal mess, and it is taking years to climb out. Tough decisions need to be made in Washington. The government must get their financial house in order and prioritize 'butter spending' (jobs creation, infrastructure projects, education) to spur a strong economic revival. Until that happens, we inch our way out of the abyss, step by tiny step.
So Where Does That Leave Investors?
Individuals and businesses tighten their financial belts during recessions, spending less money on vacations, entertainment and recreation, high priced clothing, furniture, cars, etc. Among the companies that survive and even thrive are manufacturers and sellers of consumer staples, and – during the recent recession - businesses supporting the war effort.
Procter & Gamble (NYSE: PG) sells consumer products around the globe. No company was untouched by worldwide financial woes, but P&G weathered the storm better than scores of competitors. The stock hit a five-year high of $74 on November 30, 2007 – before the economy tanked - and a low on March 31, 2009, of $47.09. It gradually climbed back, closing September 7, 2012 at $68.52. P&G is a stable, large cap company with a long history dating back to 1837. P&G offers an attractive 3.25% dividend yield ($0.562). Its current P/E is 21.67. An operating margin of 20.4, a 0.66 revenue/employee ratio and .07 income/employee indicate this massive corporation (126,000 employees) closely monitors expenses and operates a fairly efficient business.
Another company surviving the tempest is Dollar General Corporation (NYSE: DG), catering to recession-weary folks seeking low-priced merchandise. DG debuted on the NYSE November 12, 2009, closing at $22.73, and closed September 7, 2012, at $49.85. Its uphill climb has been continual and steady, although the stock is down from its June $54.39 high. Its current P/E is 22.86. DG does not pay a dividend, but offers growth potential as the company expands. January, 2012 DG operated approximately 9,800 stores and announced plans to open 625 stores and add 6,000 jobs in 2012.
Defense-related companies and industries supporting the war effort survived the Great Recession. For example Lockheed Martin reached a low on February 27, 2009, of $63.11 and a high of $116.44 on August 29, 2008. The stock closed September 7, 2012, at $92.18. As the country winds down its overseas military commitments, defense contractors may lose business to butter-related spending priorities.
The following chart shows the price fluctations for P&G from January, 2000 through September 14, 2012. P&G declined during the financial crisis, but the fall was not as precipitous as the DJIA. The chart indicates the tight range of P&G stock since 2010. Dollar General rose steadily since the stock went public in 2009. Looking at DG you would not believe the country experienced recession. The stock has dropped slightly since its June 2012 high.
Procter & Gamble, Dollar General, and the Dow Jones Industrial Average During the Recession Years
Eventually cars and appliances must be replaced, businesses need to upgrade equipment, and everyone gets tired of being cautious, frugal, and counting pennies. They want to splurge on a vacation, a nice dinner out, and a new outfit. Businesses and folks employed begin spending again. Companies outlasting the downturn and planning future growth step in to take advantage of this window of opportunity.
Starbucks (NASDAQ: SBUX), providing high-priced coffee beverages, suffered during the slump, striking a $7.83 low on November 21, 2008, then sluggishly edging up, attaining a high of $59.295 on April 22, 2012, and closing September 7, 2012, at $51.17. The company floundered during the recession, but eventually found its footing and increased sales, offering lower-priced beverages and expanding its product line. SBUX operates stores in 29 countries around the world. SBUX appeals to environmentally-conscious investors. The company advocates a Shared Planet commitment that sources coffee ethically, supports recycling efforts, funds local projects in coffee-producing countries, and specifically focuses on education and skills training programs.
The auto industry was extremely hard hit, GM surviving with government intervention. Ford (NYSE: F) slumped into penny stock territory, closing at $1.87 on January 30, 2009. Ford and the auto industry have, remarkably, recovered. Ford closed on September 7, 2012, at $10.14. Bloated car manufacturers have renegotiated union contracts, closed plants and marketed new cars. As a result Ford's revenue/employee is 0.83 and income/employee an impressive 0.12. Its current P/E is a low 2.09. And, crucial to the company's long-term survival, Ford is selling cars. Escapes and Fusions are sprinting out of dealerships. August, 2012 sales of cars, utility vehicles and trucks increased 13% compared to August 2011.
Abercrombie & Fitch (NYSE: ANF) was a retail success story. The stock closed at $82.04 on November 30, 2007, but when hard economic times hit too many people avoided their stores. The stock fell to $17.85 on January 30, 2009. It is now, along with the economy, slowly recovering, closing on September 7, 2012, at $36.48. ANF stumbled badly during the recession. The company did not discount merchandise while competitors offered discounts and sales. As a result sales declined 5.59% in 2009 and 17.28% in 2010. Sales eventually recovered, increasing 18.44% in 2011 and 19.87% in 2012. Consumers of fashion retailers are notoriously fickle, but ANF has successfully attracted and retained customers - as long as they can afford ANF's products.
Not all companies survive difficult economic periods. Business strategy and management decisions prove crucial as companies attempt to outlive tough times. An investor’s mission is to decide which way the economic winds are blowing, which companies have management teams in place to maneuver difficult waters, and invest accordingly.
Assuming the country moves from massive expenditures for guns (war and defense spending) to concerns about butter issues (jobs, education, the environment, etc.), butter-related spending will follow. A return to economic prosperity will benefit job seekers, consumers, a variety of businesses and industries and smart investors.
Looking for more analysis?
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The only stock mentioned above blogger Mercyn owns is Starbucks. The Motley Fool owns shares of Ford, Lockheed Martin, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Ford, Starbucks, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.