Value stocks are shares in companies that trade at relatively low multiples compared to their earnings and growth potential. They are a great way for investors to minimize risk by betting on mature and profitable businesses. Dollar General (DG 0.17%) and Electronic Arts (EA 0.23%) are two value stocks that would make great buys in October -- they boast modest valuations, and their business models work well in this challenging economic environment.
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Dollar General: A defensive pick in this troubled economy
Dollar General is a discount retailer that focuses on low-priced consumer staples. With a P/E multiple of 23, the stock has a modest valuation compared to the S&P 500's average of 29. And it seems poised for continued success because of its recession-proof business model and expansion into higher-margin goods like houseware and self-distributed fresh foods.
According to the National Bureau of Economic Research, the U.S entered a recession in February. Now, six months later, the country is still struggling with a 7.9% unemployment rate, which can impact the amount of money some families have to spend on necessities. As a discount retailer, Dollar General can perform well in this challenging economic environment because of its affordable prices.
Second-quarter net sales jumped 24.4% to $8.68 billion. According to CEO Todd Vasos, this growth reflects the continuation of coronavirus-related trends that started in the first quarter -- when revenue also spiked by 27.6% against the prior-year period. It is unclear whether Dollar General will maintain its high revenue growth rate when the crisis is over, but management aims to continue delivering value to investors with new strategic initiatives.
In its "DG fresh" program, the company will distribute its own perishable goods to cut out middleman costs and potentially offer lower prices to consumers. Dollar General also aims to stock a wider array of higher-margin "non consumable" household goods at its stores. Both strategies can help boost the company's bottom line, even if revenue growth slows down after the pandemic.
Electronic Arts: Multiple catalysts for growth
With a PE of just 19, Electronic Arts boasts an enticingly low valuation -- especially compared to comparable video game companies like Activision Blizzard, which trades at 34 times earnings. Electronic Arts will likely benefit from elevated demand for stay-at-home entertainment amid the coronavirus pandemic, as well as its partnership with Valve to release titles on the Steam PC gaming marketplace.
According to industry tracking firm NPD Group, consumer spending on video games is up 37% year-over-year in August to $3.3 billion. Electronic Arts is behind much of that expansion with its Madden NFL 21 and Sports UFC 4 -- the two top-grossing titles in the period. Electronic Arts plans to drive continued growth by hosting its games on Steam, the world's largest PC game distribution platform.
Electronic Arts added 30 titles to Steam as of the first quarter. And the distribution agreement can help boost sales growth in the PC market because of Steam's expansive reach (90 million MAUs as of 2018). Electronic Arts is also synergizing Steam with its existing Origin distribution platform by allowing players on the two networks to play together.
Electronic Arts' net sales jumped 20.7% to $1.46 billion in the fiscal first quarter. And management is guiding for full-year revenue of $5.63 billion -- representing a 1.6% gain over the prior-year period. Electronic Arts is mature, and investors shouldn't expect breakneck revenue growth going forward. But the company's consistent profits and low valuation make it an excellent way to bet on a strong industry at an affordable price.
Two great bets in this uncertain economic environment
The recent recession and ongoing coronavirus pandemic are two of the biggest challenges in the economy right now, and investors should bet on companies that can weather the storm.
Dollar General targets lower-income customers, so its business model is perfect for periods of high unemployment. Electronic Arts, on the other hand, can hedge your portfolio against a worsening coronavirus pandemic -- as social-distancing behavior tends to boost demand for stay-at-home entertainment. Both companies trade at attractive valuations compared to their stellar potential.
