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 (NYSE: LNKD) is the new kid on the block in this industry and, with its social network and three separate revenue streams, it looks like the one investors are most excited about.
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 (NYSE: MWW) and Dice Holdings, may benefit from the sluggish job growth, but these two online job boards seem to be on the decline compared to Linkedin. Clearly, the market agrees, giving the upstart social network a market cap more than 10 times that of its two competitors. LinkedIn has smashed earnings estimates by 50% or more in each of the last four quarters, and I expect it to do the same this time around, especially given the disappointing job growth in the second quarter. Analysts have barely raised estimates over that period, and shares rose 7% when LinkedIn reported Q1 earnings.
Daily deals
Just about every slur imaginable has been hurled at Groupon (Nasdaq: GRPN) since its IPO last fall. Market-watchers have called the daily deals pioneer a fad, faulted its business model, questioned management’s qualifications, and pilloried its financial reporting after an accounting scandal broke. Perhaps the only thing they haven’t said is that it’s a secret cult.
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 (Nasdaq: ZNGA) might simply be a purveyor of stupid online games; but, to others, it’s a creator of stupid addictive games. Just ask Alec Baldwin. The actor was famously booted off a plane for continuing to play Words With Friends after a flight attendant warned him not to. And he’s not the only one. Farmville is often recognized as the most addictive game on the Internet, and pop psychologist Dr. Phil even diagnosed a "Farmville addiction." Also, 97% of teenagers now play video games, and in the age of Facebook (Nasdaq: FB), I’m willing to bet that social games win out among the youth.
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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