One year ago, U.S. GDP growth printed 3.2% for Q4 2013. That initial estimate would later be adjusted downward to 2.6%, but even the revised figure still represented noticeable acceleration compared with the last few years. Could the economy finally be gearing up to enter full-on expansion mode again?
In the February 2014 issue of Investor Advisory Service we used the “Investment Comments” section to poke gentle fun at the U.S. economic recovery which was always supposed to be on its way but was never actually showing up. It missed its queue the first time when economists started looking for a “recovery summer” in 2010. Then the same thing happened again in 2011, then 2012…then 2013.
We noted some reasons why 2014 might be different. Other world economies seemed to have finally bottomed, helping U.S. exports grow 5% year over year. Consumer spending was on the rise, helped by the “wealth affect” produced during bull markets when people look at their rising stock portfolios and decide they can afford to spend more. The U.S. economy’s most persistent wart was the awful job market. Hourly earnings grew only 1.8% in 2013, about the same as overall inflation. New hiring was only keeping up with population growth. The unemployment rate was slowly declining, but that decline was mainly attributable to discouraged workers leaving the labor market. We expected improvement, but we had to shake our heads at the dismal state of things.
From an investment perspective, our biggest concern was that the stock market might be ahead of itself, due to the fact that its rapid advance from 2009-2013 had come in the midst of modest economic growth. We concluded by noting that the best thing to do is buy the best stocks you can:
However, the direction of future prices is not under our control and most attempts at market timing have proven to be futile. We still see adequate potential from enough stocks, plus a few new opportunities that emerge, to keep us encouraged that stocks remain the best investment option. In this period of moderate profit growth but high stock prices, selecting good individual companies remains important.
The economy went on to contract 2.9% in the first quarter of 2014, hurt by unusually severe cold weather throughout much of the country. Growth bounced back nicely in the second and third quarters, growing faster than 4%. Fourth quarter data is not available yet as of this writing. Investors who remained in the game last year were rewarded. Once again, the S&P 500 outpaced the broader economy, appreciating 13.7% including dividends.
Each month we feature three companies we believe are especially interesting and potentially timely. Let’s take a look back at one of the feature stocks from the February 2014 issue, America’s Car-Mart (NASDAQ: CRMT). Here at IAS, we pride ourselves on showing subscribers a variety of ideas, including some big names, lots of midcap companies, and the occasional smaller, under-the-radar name. America’s Car-Mart is one of the smallest names we follow. The company sells used automobiles to lower-income buyers, often with poor credit histories. Although it operates is an unglamorous industry, the company serves a real need and its business model works. Car-Mart has grown both organically and by adding more dealerships. When we started following the company in 2011 it had 110 dealerships. It now has 138. Management has bought back stock aggressively at good prices in the past, shrinking the share base by almost 20% since 2010. That’s like being paid a stealth dividend of 5% and reinvesting the money back into the company.
After a strong 2011, Car-Mart shares traded sideways in 2012 and 2013. In early 2014 we decided to feature the company again. Shares traded at $42.22 at the time of our feature. The stock’s first interesting move was downward, falling into the mid $30’s in late February after reporting one of the uglier quarters in the company’s recent history. Same-store sales declined 3% and higher credit losses necessitated a $5 million charge to increase loan loss reserves. Even backing out the credit adjustment charge, EPS still declined 20%. We believed performance would eventually improve, noting that Car-Mart had bounced back from other weak quarters in the past, and we recommended that value-minded investors keep a close eye on the company. The next quarter was even worse, showing same-store sales down 7% and GAAP EPS down 28%. If we didn’t have a successful history with the company it would have been difficult to keep recommending it at as a growth story.
Performance improved noticeably from there. In the first quarter of Fiscal 2015, reported in August 2014, same-store revenue was close to flat while total revenue increased 4%. EPS was flat compared with Q1 Fiscal 2014. Flat performance is nothing to brag about but at least the quarter did stem the decline. Shares began to rise again as investors looked forward to the company reestablishing its growth trajectory. In August, shares climbed above the level at which we originally featured the stock, took one small dip back below $40 when small cap stocks turned down in early October, and then it was off to the races. From early October to early December, shares gained more than 35%, including a big boost from Fiscal Q2 results which showed revenue up 11% and EPS up 36%. That’s a lot of bounce-back considering how ugly things had been just six months before. At a recent price of $53.38, CRMT shares have gained 26% from the time we featured them in our February issue, about doubling the S&P 500’s total return during the same period.
Because Car-Mart’s results can be quite volatile, this would be an easy stock to get “shaken out” of when the company reported some bad quarters. We have a history with the company, however, and we could distinguish between true disaster and normal volatility. Despite a slow start, this pick really worked out nicely for those investors who stuck with it.