The economic malaise over the past few months has sent a number of stocks into a tailspin, thanks to a perfect storm made up of the European debt crisis, a sluggish recovery at home, and slowing growth in emerging markets. Carmakers and other equipment manufacturers have taken the slowdown particularly hard, and tech stocks have scaled back sharply this week amidst declining guidance.
Despite the bad news, some stocks benefit from a bad economy. A handful of them can be found in the recent group of web 2.0 IPOs, all of which receive just one star, the lowest rating from our CAPS community of stock pickers. Let’s take a closer look at three stocks that could be booming during the bust.
Employment services
Probably the most obvious type of business to benefit from high unemployment are job placement services. LinkedIn
Naturally, you would expect registration and traffic on the site to pick up in a recession, and that’s exactly what happened in 2008 when the financial crisis hit. Monthly visitors doubled from the first half of the year to the second, from 1 to 2 million, and particularly accelerated in September when the stock market crashed. In just one month, between December 2008 and January 2009, total minutes spent on the site doubled, according to ComScore.
Other job-hunting companies, like Monster Worldwide
Daily deals
Just about every slur imaginable has been hurled at Groupon
In the process, the stock has crumbled, and it’s now worth less than 40% of what initial investors paid. But Groupon’s fundamentals haven’t significantly changed over that time -- just the market’s perception. The company actually reported a narrow adjusted profit in Q1, proving the skeptics wrong, and analysts anticipate earnings of $0.03 per share this time around.
Like LinkedIn, Groupon figures to be another company benefiting from the slow economy. It’s no surprise that the modern-day couponer was born, and the daily deals industry along with it, in November 2008, as the country was plummeting into recession. Consumers are more price-conscious in lean times, and the merchant partners that Groupon relies on are more willing to offer discounts, or experiment with the unique marketing proposition that Groupon offers.
As the economy underwhelmed in the second quarter, I expect Groupon’s popularity increased. It doesn’t hurt, either, that the discount merchant has been growing faster abroad than in the U.S., because much of Europe is under even more economic duress. Groupon has posted higher margins in its older North American markets, but I’m betting that the international segment will narrow the gap in Q2. Look for an earnings beat here, as well.
Social gaming
To you, Zynga
It’s not just teenagers, either. More than half of adults play video games, and 20% do so daily, or nearly every day. In a depressed job market, people look for escapes. During the Great Depression, the movie industry boomed, as luckless Okies sought solace in the glow of the silver screen. Today, free online games, like the ones Zynga offers, fill the same void. It’s hard to imagine something more escapist and mindless than tending digital crops in an imaginary world. Ironically, games like Farmville, with the timed chores they require, also provide the same sense of responsibility that the long-term unemployed are likely craving.
While the poor unemployment reports may be helping video game-makers like Electronic Arts and Activision Blizzard, as well, Zynga’s the real winner here. Its games are free, social, and readily accessible, without the need for a separate console. Wall Street is expecting a repeat performance from the social gamer with the same $0.06 EPS it posted in Q1. With a bar that low, I’m betting Zynga will have no problem flying over it.
Foolish takeaway
With Zynga and Groupon near historic lows, there’s plenty of upside to these stocks if the companies can once again convince investors that they’re operating sound businesses. Wall Street has essentially maintained its estimates over the last three months, ignoring any upside potential from the bad economy. That looks like a mistake. If you’re thinking about buying any of these stocks, now seems like as good a time as any.
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