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In tough times, 'desperation stocks' are market's hot commodity

Stocks in companies that cater to the down-and-out, like dollar and rent-to-own stores, have been enjoying an upswing.

Times (2009)

Stocks in companies that cater to the down-and-out, like dollar and rent-to-own stores, have been enjoying an upswing.

NEW YORK — As the jobless rate inches up and the economic recovery sputters, investors looking for a few good stocks may want to follow the money — or rather the TV, the beloved Fender guitar, the baubles from grandma, the wedding ring.

Profits at pawnshop operator Ezcorp Inc. have jumped by an average of 46 percent annually for five years. The stock has doubled from a year ago, to about $38. And the Wall Street pros who analyze the company think it will go higher yet.

Is the economy still just in a soft patch? A hard patch? Will the market rise or drop? Even experts are just guessing. In investing, it's often better to focus on what you can safely predict, even if that safety is found in companies that thrive on hard times. One good bet: The jobless aren't likely to find work any time soon. And companies profiting from their bad fortune will continue to do so.

The idea of investing in companies catering to the hard up might not be palatable to some people. But it is profitable.

Mark Montagna, an analyst at Avondale Partners in Nashville, has developed what he calls the "value retail" index of 11 companies — dollar stores, off-price shops and clothing and footwear chains favored by shoppers looking for deals. The index is up 149 percent since February 2009, which marked the lowest month-end closing value for the S&P 500 during the recession.

Desperation stocks continue to be lifted by a drumbeat of bad news. Consumer spending, adjusted for inflation, has fallen for two months in a row — the first back-to-back fall since November 2009. On Friday, the government reported the unemployment rate rose to 9.2 percent in June, sending stocks in a tailspin.

"It's been a good year," said John Coffey Jr., a Sterne Agee analyst, referring to the companies he follows, not the economy.

"People are broke. They're all chasing value. It's a seismic shift in mind-set," said Avondale's Montagna.

Some experts think these down-and-out stocks are just as likely to fall now instead of rise. It's not that they think the recovery will turn brisk and people will get jobs and shop elsewhere. It's that things could get worse — making customers too poor to borrow or buy even from these outfits.

Rent-A-Center, the furniture store, is already suffering. Some of its core low-income shoppers have seen money they would have spent leasing a couch or cocktail table eaten up by rising food and fuel bills.

But not to despair. According to Nick Mitchell, an analyst at Northcoast Research, wealthier customers, say those making $45,000, are feeling so strapped lately that they're starting to rent furniture, too.

Top performers

Stocks are soaring in many companies whose activity rises as the economy struggles. Here are some of the top performers in those categories:

Rent-A-Center: Shares in the company, which leases televisions, couches, computers and more, are up 57 percent from a year ago to nearly $32. Nine of the 11 analysts covering the company say it will rise further and that investors should buy it.

Advance America Cash Advance Centers: Stock in the payday lender has doubled from a year ago, to just under $8.

Cash America International: Its stock is up 64 percent, to $58, in the past year. Such firms typically provide high-interest loans — due on payday — to people who can't borrow from traditional lenders.

Encore Capital Group: Shares in the debt collector, which targets people with unpaid credit cards bills and other debts, have risen almost 50 percent last year.

In tough times, 'desperation stocks' are market's hot commodity 07/11/11 [Last modified: Monday, July 11, 2011 9:58pm]

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