It was a nightmare of a year for the retailers in 2008. It doesn’t look like the start of 2009 will be much better for them. After a whopping 160,000 stores closed in 2008 I am expecting many more closings to follow in January and February.
You see, many of these “ailing retailers” won’t tip their hand that they are about to fold until they’ve raked in every last cent they can from the Christmas and after Christmas sales. Once this rush dies off by the end of January, we will see the next wave of closings.
Some retailers will just be trimming back some of the stores in their chain while we’ll see others shut down their entire chain of stores and go into bankruptcy. It will be interesting to see if there are any “takeovers” too during this tumultuous time. For if there are ones that feel they have strong enough balance sheets and enough cash on hand to buy up a competitor, then that could be a good sign for the acquirer.
You may say, no…that’s good for the “acquired”. And it is. I won’t argue with that point. However, if you want to see if management has a “vote of confidence” in its future, then look to hold those companies that are on the acquiring end. They are the ones that are most likely to survive over companies that are just “holding down the fort” in times like these.
Now, more than ever, it’s time to buy companies with strong balance sheets and not those with “beaten up and bruised” balance sheets. “Buy strength” rather than the tendency to buy weakness.
So if you see companies getting “gobbled up”, look to see who is acquiring them. You don’t even have to know how to read a balance sheet then. Just buy the company that feels confident enough that they have enough cash and strength of management to not only ride out the storm themselves but that they’ve got the excess cash and man power to turn around a company that’s on the rocks too.
We’re living in tough times when we see “big guys” like Circuit City, Linens ‘N Things, The Sharper Image and Steve & Barry’s go into bankruptcy. So just because you are “big” doesn’t mean that you can’t fail.
Here are Some Strong Companies that will Survive and Remain on Top.
Even if we don’t see takeovers, you will want to focus on the surviving companies that now have a “lack of competitors”. Because the people that used to shop at the companies that went under will now have to go to the ones that are left. So their “share of the pie” will increase.
This will bring an eventual increase in the earnings stream to the surviving companies. Companies like Wal-mart (WMT), Target (TGT) come to mind in the discount retail space. Also, other huge companies that are in the “deep discount” business like Dollar Tree (DLTR) could do very well in these “tight’ times.
Companies like Toyota will benefit from Ford, GM and Chrysler spinning their wheels. Because if you are just focusing on surviving, you can’t be focused on growth as you should. Therefore, even if these automakers survive, almost by default, Toyota will gain market share.
The novice investor will take this time to gamble on the $1 to $2 stock, but I’d encourage you to focus on the ones that really survive and take market share. Those are the ones you want to own.
Think of it this way. If you were to buy an entire business, would you want to buy the market leader or the ailing company that’s on its last leg? If you could afford it, would you buy all of Toyota or all of GM? Would you buy all of Wal-mart or all of a smaller competitor? You’d buy the strong one hopefully because your odds of success would be much higher.
This is the way you want to think when buying 50 to 100 shares of a company too.
If you liked this article and you want to learn more “nuggets” like this that can help you out in your investing, I’d encourage you to look into our online investing course which can be found at this link:http://www.mywealth.com/investing.html
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