Do Honest Retailers Offer Better Investment Returns?

Forbes recently published a list of the 100 most trustworthy companies in America. Dollar Tree, Dillard's, and PriceSmart are the three diversified retailers on this list, but does that make them better investments?

Apr 14, 2014 at 2:00PM

Every year, Forbes collaborates with GMI Ratings to develop a list of the 50 Most Trustworthy Companies in America. The company with the highest Aggressive Accounting and Governance Risk (AGR) score is considered the most trustworthy, and trustworthiness goes a long way toward outsized, long-term shareholder returns.

The three companies listed in the diversified retail category on GMI Ranking's list are: Dollar Tree (NASDAQ:DLTR), Dillard's (NYSE:DDS), and PriceSmart (NASDAQ:PSMT). Dollar Tree's AGR went from 70 to 91. Dillard's went from 78 to 91, and PriceSmart's actually decreased from 78 to 67, but it still made the list.

GMI also publishes a list of the 50 worst AGI scores -- it is called the Risk 50 List. The only two companies in the retail category were Groupon, Inc. (NASDAQ:GRPN), and Urban Outfitters (NASDAQ:URBN).

Trustworthiness and price performance
While corporate risk is important for investors, it may not have the same value as trust in brand from a growth or margin perspective, but perhaps the two are connected. If they are, we should be able to see some correlation between the most trustworthy retail companies and price performance.

The chart below shows that the most trustworthy companies are priced higher in terms of price. What's even more interesting is that all five of these retail companies were trading at around the same level until 2011. Since then, Dollar Tree has been in a holding pattern along with Urban Outfitters, and PriceSmart and Dillard's have been fighting for the top spot for the past three years. Groupon, on the other hand, started out as a great idea before investors realized how shallow its moat was.

PSMT Chart

One-year share price returns show a different story, however. The chart below shows that even though Groupon is on the 50 most "untrustworthy" list, it actually has the highest one-year price return, followed by PriceSmart and Dillard's. Groupon may be an anomaly, but it seemingly contradicts the theory that price return, at least on a short-term basis, has anything to do with trustworthiness in the world of business.

DLTR 1 Year Price Returns Chart

When price is misaligned with earnings, there may also be an opportunity for a value-based investment. The chart below mimics the price chart above. The most trustworthy companies -- Dillard's and PriceSmart -- also appear to generate the highest earnings per share. In this instance at least, trustworthiness may also be a mark of higher earnings performance.

PSMT EPS Diluted (TTM) Chart

Trust is a hard attribute to measure, but it can affect sales in very measurable ways once lost. This analysis is hardly scientific, but it does suggest that:

  • Trustworthy retail companies have better earnings performance (Dillard's and PriceSmart).
  • Trustworthiness and price returns don't have a predictable relationship (Groupon).

Now it's down to two companies: Dillard's and PriceSmart. Dillard's has the highest AGR over the past two years, and the highest earnings per share. It also has the second highest stock price, just behind PriceSmart -- perhaps this little analysis is also pointing out that PriceSmart is overbought.

AGR isn't the only thing that's falling for PriceSmart; same-store sales have dropped consistently over the past 12 months, and it has a P/E ratio of 36 times, much higher than its peers at 18 times. In the video below, Fool contributor Brian Stoffel provides some specific same-store sales levels to look for in the April 9 earnings report. If PriceSmart misses on any of these expectations, it may be the start of a downtrend. Dillard's, on the other hand, has a P/E of 13 times, and its AGR is rising. It also reported a record-setting fiscal year 2013 with a $6.99 EPS.

The GMI Ratings report may not be the best indicator of price performance, but from a value perspective, it could suggest Dillard's is the better investment over PriceSmart or Groupon.

Warren Buffett, the greatest value investor of them all, has made billions through his investing and through the years Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this great resource.

C Bryant has no position in any stocks mentioned. The Motley Fool recommends PriceSmart and Urban Outfitters. The Motley Fool owns shares of Dillard's. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information