Rather than sitting on the sidelines, my concerns drive me to seek out businesses that can thrive in the face of economic adversity.
Last week, I put new money to work investing in stocks. I’m sure critics will call me naïve for investing time like this. But I don’t consider myself naive. Conversely, if I’m being 100% transparent, I’m worried about the US economy.
For starters, the US national debt recently surpassed $35 trillion. I don’t know where the breaking point is. But the national debt certainly appears to be rising at an unsustainable rate, bringing that breaking point ever closer to wherever it may be.
I often hear people complain about how politicians created this problem by failing to balance the budget. But the average American family is no better off. Household debt is now at an all-time high of $17.8 trillion, including $1.1 trillion in credit card debt.
US credit card debt; Data by YCharts.
Some advocates of the economy point to „elastic” consumer spending. But if debt is mounting, is spending really sustainable? At some point, perhaps soon, it seems likely that the debt will run out. With so much money already depleted, consumers will run out of cash.
In short, I wouldn’t be surprised if out-of-control government spending eventually necessitates some tough decisions that set the economy back. And uncontrolled household spending can quickly lead to a discretionary spending spree. These are the two things that worry me the most about the economy.
Why do I invest anyway?
I worry about the economy, but why am I an investor anyway: I’ve worried about the economy for years, but it’s changing in unexpected ways. Also, it usually continues to be bullish, and stocks touch new highs.
More than this, the stock market rises in most years, which is another incentive to invest money early.
Rather than letting fear sideline me, I choose to address my fears through the investment decisions I make. In other words, I think an economic recession is potentially around the corner. Therefore, I prefer to invest only in undervalued businesses that are financially strong for the long term.
In my view, the beverage company Celsius (CELH 0.53%) and discount seller Five down (Five 2.51%) Two businesses fit this description.
1. Centigrade
As of the second quarter of 2024, Celsius had more than $900 million in cash and cash equivalents and zero debt. Of course, investing is more than just finding a business with a strong balance sheet. But in tough economic times, a strong balance sheet is an asset, and that’s one of the reasons I’m comfortable buying Celsius stock right now.
As with the balance sheet, there’s more to investing than finding a stock that trades cheaply. But all else being equal, a stock is good when it’s cheap, and I believe Celsius stock is.
A good comparison Monster Drink Stock. As the chart below shows, Monster stock has traded at an average price-to-sales (P/S) ratio of 9 over the past 10 years, with valuations deviating significantly from that average. Therefore, the market will value the quality beverage business at this price. As shown in the chart below, Celsius stock is 30% cheaper than this, which I think is attractive.
CELH PS ratio; Data by YCharts.
Thinking of the big picture, I like Celsius as an investment because its margins are improving as it grows. In recent years, Celsius has risen from obscurity to the No. 3 position for energy drinks, trailing behind Red Bull and Monster.
What is interesting here is that Red Bull and Monster have a large presence in international markets, whereas Celsius is yet to launch. International expansion alone can continue growth for several years.
Also, Celsius has an opportunity to improve its profit margins. In recent years, growth has been so rapid that management has not had time to improve operations. But now that things have calmed down (second-quarter revenue was up an even stronger 23%), it could make changes that improve profitability. For perspective, net profit increased by 70% in the first half of 2024 compared to the same period in 2023.
For these reasons and more, I like Celsius stock for the long term.
2. Five down
Like Celsius, I like the Five Below stocks for the long term. Apart from lease agreements, it is also debt free. And it is well capitalized with more than $350 million in cash, equity and short-term investments. And, at a P/S of 1, the stock has never been this cheap in its 12-year public history.
The Five Below is down more than 60% since the start of 2024. I think they are overreacting after the sudden CEO exit and the investors exited and missed expectations for the first quarter of 2024.
In 2024, Five Below expects same-store sales to decline 3% to 5% — that’s optimal, and management is likely to lower those expectations further when it reports second-quarter financial results on Aug. 28. With this decline in growth, the company expects a full-year net profit of nearly $300 million.
The five stores below are relatively inexpensive to open and have a quick payback period of one year. In the coming years, management expects to open more than 1,000 new locations. Considering the unit economics, this should raise both revenue and profit substantially.
Sales may be down in the near term, but I fully expect Five Below’s profits to rise in the long term. That’s why I’m happy to add shares of this well-capitalized retailer to my portfolio now.
In conclusion, the economy may struggle in the coming months and years. If that happens, there will be plenty of businesses that will have a tough time. But Celsius and Five below are poised to push through financially uncertain times and reward shareholders in the long run. That’s why I recently invested in these two.