Saturday, June 22, 2013

What Miss Utah Really Should Have Said...

I would have voted for Miss Utah. Not only did I find her the most attractive but she also gave a pretty coherent answer to a question which appeared to be come pre-loaded with a rather poorly thought out line of argument.

It gets worse. Most of the press following the famous question and answer session in the Miss USA pageant hasn’t managed to give a better answer to the question despite having ample time to think about the subject matter. Miss Utah was given about a second to respond. In this article I want to explain why and discuss a few stocks that are set to benefit from what the question/answer says about society.

A silly question deserves...

Let’s start with the question.

"A recent report shows that in 40 percent of American families with children, women are the primary earners yet they continue to earn less than men. What does this say about society?"

The report in question appears to be the Pew Research Center Report on “Breadwinner Moms”.  Of course ‘families’ includes single parent families and this is the clue to understanding this report.

In the context of this question there are three conclusions from the report and they are graphically represented here. All data is sourced from the report. The first two data sets relate to the % of households with children under 18.

A few notes.

  • From 1960 to 2011, the percentage of married women earning more than their husbands rose from 3% to 15%. This implies that women’s relative position –for whatever reason- is better.

  • The percentage of single mothers as the primary breadwinner has risen dramatically.

  • The percentage of never married single moms has exploded to 44% from 4%. This is not about increases in divorce rates ,although that surely helps too.

Frankly only the most fervent equalist can expect a single parent to have the earnings potential of a married or single person. The evidence is that married women are doing relatively better so anyone reading the Pew report and then focusing on why women aren’t earning as much as men, is engaging in rather a pointless exercise. It is surely far better just to try and stop, or rather not incentivize, women  getting into single parenthood.

The gender pay gap is a myth

Aside from this observation, there is another line of argument which sees the male/female pay gap to be a complete myth anyway and even a Dept of Labor report on the matter argues

“this study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers”

Sounds reasonable to me.

The real answer

It strikes me that the real answer to the question of what it ‘says about society’ would be point out that the gender pay gap doesn’t actually exist. Married women are relatively better than they were before and something has been happening in order to make single parenthood more socially acceptable and economically viable.

But back to investing

If the trend continues towards single parenthood, increased divorce rates, according to many commentators, this implies more poverty, more crime and more social discord. Meanwhile married woman’s relative purchasing power seems to be increasing. Given these trends, which stocks could benefit?

I think something like Whole Foods Market (NASDAQ: WFM) could be a long term winner. I never cease to be amazed that its management has argued that the 80/20 rule seems to apply in its business. In other words 20% of its customers can generate 80% of its revenues. Therefore the way to think of this business is as having the potential to convert a relatively small number of wealthy married women into long term customers. Investors shouldn’t underestimate the cultural significance of this fact. Let’s recall that the other great movement in retail over the last few years has been trading down.

Of course trading down is also a consequence of these trends in society. Granted the recession and the difficulty in recovering lost jobs didn’t help but the trend towards single parenthood and welfare dependent parentage is likely to benefit the dollar stores like Dollar Tree (NASDAQ: DLTR). In my opinion this is the best performing dollar store right now. In fact it is the only one that has managed to grow discretionary sales more than consumables recently.

While it is certainly true that same store sales growth is slowing at the dollar stores at the moment, they still have good long term prospects from new store rollouts. Dollar Tree plans to increase square footage by 7.3% this year so even if same store sales come in at low single digits, it will have top line growth. My one concern would be that its forward PE of 15.3x doesn’t leave much room for error.

In tandem with the idea of increased poverty and crime, investors should look to how retail companies might fight shrinkage. In other words stop in store theft. One play on thse theme could be Verint Systems (NASDAQ: VRNT). Indeed I note that in its recent results it discussed a $4million order with a bog box retailer for its video surveillance systems. Although video intelligence only makes up a mid teens percentage of revenues, Verint also sells other intelligence solutions that help fight money laundering and fraud. Some of which may well be being committed by staff.

Last but not least, I would suggest looking at Allergan (NYSE: AGN) and PetSmart (NASDAQ: PETM).  Increasing numbers of wealthier married woman should be inclined to spend on cosmetic surgery and Allergan’s Botox is the global leader. Indeed I note that despite the slowdown in Europe, Allergan reported strong growth in Europe. Or is the recession reducing the number of alpha males out there and leading more hypergamous women to take up cosmetic surgery? Add in the growth prospects from increasing medical use of Botox (migraine, spasticity, bladder etc) and long term prospects look assured.

As for Petsmart, the argument is that more single parents, later marriages and increased divorce rates will lead people to take on pets (and spend money on them) as a way to supplant an emotional attachment that is missing in their lives. At least that’s how the industry sees it.

Here is the data on U.S. pet expenditures from the American Pet Products Association.

Its recession resistant numbers speak for themselves. There is a long term secular trend here and I think companies like PetSmart are benefiting from it.

The bottom line

Unfortunately Miss Utah didn’t have time to give a thought out answer to the question. But in any case the question was a lot dumber than she was made out to be.

Thanks to readers for sticking with a long article. I hope there are some interesting investment ideas here plus an attempt to tell the truth about what the data really says about society, rather than try and correlate it to some pre-supposed feminist dogma.

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