Three Garbage Stocks

The market goes up everyday…

This two-year chart represents the thirty varsity players on the U.S. economic court.

You might look at this 100% gain in two years and think that this bull market is overdue for a correction.

But don’t worry. Uncle Ben, our fair Chairman over at the United States Federal Reserve, has it all in hand.

This is not the time to fret over debt, inflation, taxes, or unemployment…

Don’t fight the Fed

This market is simple. The Fed is pumping liquidity into the market at an unprecedented rate.

There is an old Wall Street platitude that says “Don’t Fight the Fed.” It means you buy stocks when interest rates are dropping and sell when they are going up.

The current Fed fund rate is at 0.25%. It can’t get much lower, and no one expects them to hike rates in the near future.

What are you waiting for… zero percent?

People heed the Bernanke

It looks like folks just like you and me are putting the hard times behind them…

The adjusted retail numbers for December showed $380.9 billion in sales, an increase of 0.6 percent from the previous month, and 7.9 percent above December 2009.

Total sales for 2010 were up 6.6 percent. For the fourth quarter, they were up 7.8 percent.

Car sales jumped 14.7 percent over last year. For non-store retailers like Amazon, sales jumped 15 percent. The unofficial numbers for January show a 4.1 percent gain from a year ago.

This is great stuff.

Amazon investors liked it so much that the company now trades at twice the price it did during the dot-com bubble in 1999. Amazing.

The screen

It’s a good idea to screen for stocks at least once a week. I generally screen for low P/E, small market capitalization, and good dividend. From there, I go through the list and look for red flags and growth potential.

I like the companies that are under $250 million in market value, with high future growth and fat margins. I also look at debt ratios.

I call these “garbage stocks” because they ain’t for widows and orphans, but they tend to run under the right circumstances.

Today, three companies in the retail sector popped up on my screen. All three shared my garbage stock credentials.

And they have something else in common: They cater to the petite bourgeois.

They are Books-A-Million (NASDAQ: BAMM), Collectors Universe (NASDAQ: CLCT), and CPI Corp. (NYSE: CPY).

The merchant of Wal-Mart

All of these companies sell products to the middle class, but none of their products are necessities…

Books-A-Million runs 223 discount bookstores in the Southeastern United States. Collectors Universe provides third-party authentication, grading, and related services for rare collectibles like coins, trading cards, and sports memorabilia. CPI runs Wal-Mart Portrait Studios and PictureMe Portrait Studios.

BAMM has a market cap of $92 million and a trailing P/E of 6.62. The company had a negative revenue growth of 5.5% year over year, but it does pay a fat 5.2% dividend. (They could also be a beneficiary of Barnes and Noble going bankrupt.)

CLCT has a market cap of $109.34 million, a P/E of 6.6, gross margins of 60%, quarterly revenue growth of 8%, and a dividend yield of 9%.

CPY has a market cap of $152 million, a P/E of 8.06, 8% margins, a flat quarterly revenue growth, and a 5.10% dividend yield.

All of these companies will see better numbers when the consumer goes back to the mall…

Based on recent retail numbers coupled with the fact that credit card borrowing posted its first gain in two years, The Wall Street Journal speculates those people who have a job are no longer fearful of losing it.

Furthermore, unemployment is forecast to drop to 8.6% by December 2011.

When the middle class gets up and starts spending again, these three small retailers will benefit.

Sincerely,

Christian DeHaemer
Editor, Wealth Daily