Recession Fears Are Looking Overblown. 3 Stocks to Buy Now
Recession fears have dogged the stock market for much of the last few years.
The 2022 bear market was premised partly on the notion that the economy was headed for a recession as interest rates rose. More recently, economic pessimism has weighed on some stock market sectors, even as the broad market has reached an all-time high on enthusiasm for all things artificial intelligence (AI).
However, investors continue to get reminders that the economy remains resilient. Federal Reserve Chair Jerome Powell has said this in recent comments, even as the Federal Reserve just lowered interest rates by 50 basis points.
Now, investors just got another reminder that the U.S. economy remains robust as the September jobs report blew away expectations. The economy added 254,000 jobs, well ahead of the consensus expectations at 150,000. The unemployment rate also ticked down from 4.2% in August to 4.1%, and wages were up 4%, easily outpacing inflation.
Economists praised the numbers, with Chicago Fed President Austan Goolsbee saying: "You really couldn't ask realistically for a better report for the economy." One month's employment report is just one data point, but it does give credence to the thesis that the economy remains on track for a soft landing, even as some businesses are still struggling with the after-effects of the earlier spike in consumer prices.
In other words, a recovering economy could lead to a number of stocks rebounding. Keep reading to see a few of them.
Image source: Getty Images.
1. Dollar General
Dollar General (NYSE: DG) shares have been slammed over the past couple of years as sales growth has slowed and profits have fallen.
The company's customer base, which is mostly made up of households making $35,000 a year or less, has clearly been affected by high inflation. Sales of its more discretionary items, like home goods and apparel, have fallen even as consumables sales have increased. Management has also noticed a pattern of sales slowing at the end of the month, a sign that customer budgets are running out.
Given this pattern, the news about wages rising 4% seems especially good for Dollar General. Like most retailers, Dollar General has a lot of leverage in its business, and a change of a couple of percentage points can make a big difference on the bottom line.
In a stronger economy, Dollar General should see profits start to rebound, and the stock looks cheap at a price-to-earnings (P/E) ratio of just 13. The stock also reacted positively to the jobs report news, up 2.7% in late Friday morning trading.
2. Target
Unlike its multi-category retail peers Walmart and Costco Wholesale, Target (NYSE: TGT) has struggled in recent years. A large part of the reason for that is that it depends on sales of discretionary goods much more than those two competitors do.
Walmart and Costco bring in a majority of their revenue from groceries, while Target relies on things like apparel, electronics, and home goods to drive most of its business. People tend to cut back on spending in those categories when times are tough.
The combination of a strong economy, higher wages, and falling interest rates should be a boon to Target, as it will give people more spending money and encourage spending on discretionary items like home goods, toys, and electronics.
Target shares currently trade at a P/E ratio of 16 and should have a lot of upside ahead if it can improve top-line growth and expand its margins. The stock is still down 43% from its peak in 2021.
3. Five Below
Few retailers are as sensitive to consumer confidence and discretionary demand as Five Below (NASDAQ: FIVE). The discount retailer specializes in products like toys, games, accessories, and beauty products that typically retail for $5 or less. The mall-based store is popular among teens and others looking for a cheap impulse purchase or a basic gift.
As you might expect in the current economic environment, Five Below has struggled, with comparable sales falling 5.7% in the second quarter. Adjusted earnings per share tumbled from $0.84 to $0.54.
Management noted macro pressures in the recent report, and it's adjusting its product assortment to contend with the challenging times. However, more discretionary income for consumers would likely help the business return to comparable sales growth and shore up its margins.
If wage growth continues to outpace inflation and interest rates come down, Five Below looks like a good candidate for recovery. In fact, the stock was up 5% on Friday after the jobs report. It's still down more than 50% this year, meaning there's a lot of room for recovery if the macroeconomic outlook shifts.Should you invest $1,000 in Dollar General right now?
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*Stock Advisor returns as of September 30, 2024Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
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