Wall Street has been in a bear market for more than a year now, and while share prices have trended upward so far in 2023, no one knows how long it will be before the next bull market begins. Still, investors with cash to deploy can take advantage of the market's downturn.
Today, we'll consider two retail stocks that offer different advantages during bear markets. One is Etsy (ETSY -2.17%), the e-commerce marketplace known for handmade, unique, and vintage goods; the other is Dollar General (DG 0.30%), the widespread and fast-growing discount chain.
Etsy has the ingredients for an excellent investment
Parkev Tatevosian: Etsy is an asset-light e-commerce company that operates in a niche but growing space. The online marketplace focuses on connecting buyers with sellers of handcrafted and vintage products. The company earns revenue by taking a percentage of each transaction on its website. With little competition to worry about, unlike other e-commerce players such as Shopify and Amazon, Etsy has carved out for itself a growing customer and merchant base over the years.
To further make Etsy's investment case more compelling, the stock is now trading at one of its low valuation in the last five years. Etsy's shares have lost roughly two-thirds of their value in a bear market that has now lasted nearly 18 months.
Being asset light is an advantage, and the company does not own any of the inventory sold on the platform. It merely brings together creators of unique items with those interested in buying such products.
Such a business model makes it more flexible in a down economy as the company can easily scale back spending on items such as marketing, and the model has allowed Etsy to grow revenue from $125 million in 2013 to $2.6 billion in 2022. More importantly, the company grew quarterly revenue by a solid 53% in the last two years despite a slowing economy fueled by inflationary pressures.
A business that needs more capital investments would have had a much harder time (though not entirely impossible) achieving that growth rate. What's more, Etsy's revenue growth has translated to operating profit growth from $1 million to $386 million over the last 10 years. An asset light business model certainly helped.
Etsy's growth slowed sharply in 2022 due to difficult comparisons with the pandemic-driven boom followed by a general weakness in the e-commerce space. But those seem like short-term headwinds as the company still has a large addressable market as its platform is focused on handmade and vintage products. That differentiation helps separate it from the rest of the competition.
Furthermore, Etsy's general competitors such as eBay (NASDAQ: EBAY), Amazon (NASDAQ: AMZN), and Shopify (NYSE: SHOP) are all struggling with increasing expenses and are passing on those extra costs to merchants who sell on their platforms. Etsy's advantage lies in its sellers' ability to pass higher expenses to buyers with relatively greater ease since the platform deals with unique products that aren't necessarily available elsewhere. Customers are more likely to foot higher prices for such products and demand is less likely to fall. THis is indicated by Etsy's improved take rate, or the average commission charged by the platform for every transaction. That's good news for investors.
ETSY PE Ratio data by YCharts.
Finally, Etsy is now trading at its lowest valuation in several years. If you expect growth to re-accelerate as consumer shopping habits normalize and e-commerce growth returns to its historical growth rate of around 15% in the next few years, then Etsy's PE ratio could resume its upward trend, driving up the stock price.
It's no surprise that Etsy is one of my favorite stocks to buy right now.
A reliable, recession-proof business
Jeremy Bowman: The retail environment lately has been challenging on a number of fronts. Many national chains are struggling with elevated inventory levels, cost inflation, and a shift in consumer discretionary spending away from goods and toward services like travel and restaurants.
However, Dollar General has the right composition to deliver strong results even in a down economy like the current one. As a discount retailer, it tends to perform well in recessions as consumers trying to stretch their paychecks trade down to lower-priced options and smaller pack sizes.
Dollar General's most recent earnings report showed off those qualities.
In its fiscal 2022 fourth quarter, which ended Feb. 3, net sales jumped by 17.9% year over year, and comparable sales rose 5.7%. The company also delivered strong results on the bottom line. Gross margin fell by 30 basis points -- which should be viewed as a victory in the current environment -- and operating profit jumped 17% to $933.2 million. Adjusted earnings per share rose 15% to $2.96, a strong growth rate for a company that operates more than 19,000 stores across the United States.
Dollar General's inventory levels rose 20%, in line with its sales growth, showing the company managing its inventory well, and management has no plans to pump the brakes on growth, either. In 2023, it has plans for 1,050 new store openings, 2,000 remodels, and 120 store relocations.
Meanwhile, the company is also buying back stock and pays a dividend that yields 1.1% at the current share price. Trading at a moderate price-to-earnings ratio of 20, Dollar General looks like an excellent buy for investors looking for safe stocks to hold as we ride out the bear market.
