Computer Chips or Cow Chips? - Tractor Supply - TSCO
In a world chasing after computer chips, it should not be unexpected my preference is for agriculture stocks. Basic finance teaches us that stocks which are uncorrelated with other stocks reduce the risk of a portfolio (thank you Dr. Markowitz). When corn is over $7/bushel, you can bet we will not not own many farming oriented stocks.
Tractor Supply - TSCO - $31 - is a well managed retailer supplying everyday needs to rural consumers. TSCO is part Home Depot, part auto supplies, part clothing, part pet store, and part general merchandise. The one thing TSCO does not sell is big tractors that plant or harvest crops. Yes, you can buy a chicken coop and the chicks, like our Vice-president just did. TSCO has been adding pet vaccination services to their stores. My guess is that about half of TSCO’s sales are consumables, but the other half is lawn & garden, truck parts, or other more discretionary purchases. When there is uncertainty in the farm economy, the purchase of things like tools slows down. Tariffs, and fear of counter tariffs, have made the farming business very uncertain over the last year.
For the previous 5 years TSCO was perceived as a growth stock, often commanding a multiple of over 30x. Today it is just another cyclical retailer selling at 15x. I do not want to own a portfolio full of “broken” growth stocks, but I can tolerate a few. The risk/reward is just too attractive.
Many of the other retailers have already had a good run (see Macy’s), so I am happy to have an “ag” retailer selling near its low.
The other retailers I considered:
The Gap - GAP - $22 - more cash than debt, CEO came from Mattel two years ago, earnings have recovered, but what is the next trick, maybe a little worried they will buy something stupid, only .70x EV/EBITDA, worth thinking about at only 10x
CarMax - KMX - $51 - well run used car business, but they have an arrogant attitude about their financing business, I fear I might be underestimating Carvana, Starboard is trying to fix things, mixed feelings
Etsy - ETSY - $75 - lots of small artists really need this company, but do consumers need the products, tariff issues are complex, need expectation to be a lower, maybe under $50
Ollie’s Bargain Outlet - OLLI - $83 - the new Big Lot’s (which faded into bankruptcy), a close-out retailer selling near its low, need to learn more
American Eagle - AEO - $17 - the Sydney Sweeney stuff is fading, there is an important women’s lingerie brand buried in this company, maybe interesting if cheaper
Home Depot - HD - $327 - just cannot get excited at 22x
Kohl’s - KSS- $17 - founder Herb Kohl used to sack my parents groceries, I know the complete history of this company, but I worry they have wrong about fashion for a long time, KSS tried to step up in quality and failed, the turnaround is difficult, watching
Macy’s - M -$25 - missed this one under $15, need expectations to fall, pass
Target - TGT - $135 - not a fan of their grocery business, pass
Advance Auto - AAP - $61 - the auto fleet is old, but the competition in just too tough, lots of old locations, pass
Dollar General - DG - $115 - I love the small store rural concept, but the charges of systematically overcharging customers are just too serious, pass
A company like Kohl’s, or Target, would be a more conventional value stock. We are not here to be conventional. It is difficult to make a call on the average US consumer right now. There will a better time to buy typical retailers. Right now the opportunity is down on the farm.