Voters across the political spectrum can agree on at least one
thing: the long-term health of the U.S.
economy
absolutely depends on jobs being created by the private sector. So
Friday's report that 64,000 private sector jobs were created is a
hopeful sign, though clearly not enough.
The chart below shows the depth of pain being experienced by small
businesses.
But even as Friday's jobs report may not yet signal a big upturn in
hiring, a few other items in the news on Friday suggest that the
private sector may create higher amounts of new jobs in the months
ahead.
First, the Treasury Department has just announced plans to provide
states with $1.5 billion to help promote small business job
creation. States have to prove that the funds are being matched
with much higher levels of bank lending, so the whole economic
boost is hoped to be closer to $15 billion. And just last week, the
Small Business Jobs Act went into effect, creating a $30 billion
small business lending fund for community banks and offering tax
cuts for small businesses.
Those efforts may help a trend that is already underway, if
little-known
ScanSource (Nasdaq: SCSC)
is any indication. This company sells a range of telephone, barcode
scanning and point-of-sale equipment to small and medium-sized
businesses. Large companies buy these wares direct from the
manufacturer. Thousands of smaller companies need to go through
middlemen like ScanSource. At the end of every quarter, the company
discusses recent sales trends -- and right now, business is doing
quite well.
Sales in the first fiscal quarter rose to around $625 million from
$488 million a year ago, well ahead of the $567 million consensus
forecast. That's pushing shares up +7%, close to a 52-week high,
which makes me hesitant to recommend shares of ScanSource in
particular. But it's a clear sign that other companies selling into
the small and mid-sized business (
SMB
) sector have increasing reason to cheer. Here are three names I
like as SMB plays:
Office Depot (
ODP
)
The tough economic environment has been brutal for this office
supply chain. Adding insult, rival
Staples (Nasdaq: SPLS)
has been a far more nimble player, stealing away
market share
. Office Depot's stock has fallen from $35 in 2006 to a recent
$4.50, but as I noted recently, that seems like too deep of a
punishment. [
Read more on why I like Office Depot here
]
Make no mistake, Office Depot has its work cut out for it. The
retailer needs to further pare debt, figure out a way to retake
market share, even as firms like
Walmart (
WMT
)
step onto its turf, and weather the effects of the downbeat
economies in Florida and California, where the store base is
heavily concentrated. But I'm heartened by recent insider buying,
improving
working capital
metrics, very cheap valuations and, as noted above, a possible
strengthening in the SMB sector. And as
I noted in this article
, retailers only need to show modest sales gains to post outsized
cash flow
gains.
Mitel Networks (Nasdaq: MITL)
This $14
IPO
is now a $6 busted
IPO
. Shares are now quite cheap, trading for less than seven times
projected fiscal (April) 2012 profits. The dead-on-arrival IPO came
public in the wrong year, as it's a play on the SMB sector, which
up until now, has been in a funk. Mitel sells phone systems and
usually sees demand when companies are hiring, with new desk
set-ups. But even with sales at depressed levels, Mitel can still
be counted on to earn $0.75 to $0.90 a share. If SMB spending
really picks up, per share profits could exceed $1.
Vistaprint (Nasdaq: VPRT)
The big slowdown in SMB spending really hurt this company, which
provides printing and marketing services to companies that are too
small to handle their printing needs on an in-house basis. Shares
plunged in early August, which looked to me to be a severe
over-reaction. [Read:
Panic Selling
Creates Potential for +35% Gains . . . At Least]
Analysts at Kaufman Bros. see shares rebounding back from a recent
$37 to $50 as the company's sales problems this summer prove to be
short-lived. "Vistaprint is currently facing a perfect storm, with
small business weakness, adverse (foreign exchange) impact and
recent execution issues. We note that all these factors are
temporary, and should reverse themselves in the future," notes
Kaufman's analysts. They predict that shares, which currently trade
for 13 times next year's profits, will trade up to a
price-to-earnings (P/E) multiple of 20 once these near-term
concerns abate.
Action to Take -->
Spending at small businesses is likely to rebound only slowly into
2011 and perhaps more robustly into 2012. But investors need to
look ahead, and these stocks could start to appreciate handsomely,
simply on the expectation that SMB spending will eventually rebound
-- and the three stocks I mentioned above are good places to
start.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.