Smart investors look for larger trends in society and invest to take advantage of such trends. Since income inequality is unfortunately one of the growing trends in our society, shrewd investors will take advantage of it.
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So what companies could see their profits and revenues grow as income inequality gets worse? As I’ve pointed out elsewhere, they might not be the ones you think. Here is a list of publicly-traded corporations that could be positioned to profit from income inequality:
Bulk discounters. These are companies that can sell large amounts of a wide variety of high-quality services at a very low price. I like the following bulk discounters because they’ve created infrastructure and ecosystems that make such low prices possible. Finally, these companies save hard-pressed middle class families something that a lot of investors forget about: time. A busy soccer mom only needs to make one shopping trip with some of these stores:
- Costco Wholesale (NASDAQ: COST)
- Grocery store operator Kroger (NYSE: KR)
- Walmart Stores Inc. (NYSE: WMT) It owns Sam’s Club and is in a good position to become a successful bulk discounter online. Its recent investments in online infrastructure, including the construction of several huge fulfillment centers; indicates that Walmart’s management team understands this segment and what customers want. By going online, Walmart can offer the Walmart price without having to go to Walmart—something a lot of people hate to do.
- Sprouts Farmers Market (NASDAQ: SFM) A bulk discounter that specializes in selling organic groceries at very low prices, it is growing fast in areas of the country experiencing strong population growth because of migrations triggered by income inequality. That includes Southwest states like Texas and Colorado.
- Amazon.com Inc. (NASDAQ: AMZN) A bulk discounter that allows people to buy at a low price without having to go to a discount store, it is no coincidence that Amazon.com just reported TTM revenues of nearly $90 billion. Like the companies above, Amazon has gone to great lengths to create infrastructure and an ecosystem to offer low prices and good service.
Companies that sell low priced electronic entertainment. This includes Amazon, Netflix (NASDAQ: NFLX), Sony (NYSE: SNE), Apple Inc. (NASDAQ: AAPL) and video game makers of all shapes and sizes. People don’t have much cash, but they still want to be entertained. Something to remember is that Hollywood boomed during the Great Depression, when movies cost a nickel or a dime.
Providers of alternative financial products. Around 68 million American adults are unserved or underserved by the banking system, according to a 2014 U.S. Postal Service whitepaper. The Postal Service estimated that these people spent $89 billion on interest and fees for alternative financial services in 2012. These people are underserved by banks because they lack the incomes or financial savvy necessary to navigate the banking system. That provides a huge market for providers of such services as:
- eBay Inc.’s (NASDAQ: EBAY) PayPal, which provides a number of low-cost and easy-to-access banking services, including Venmo. PayPal is about to be spun off into its own company.
- Green Dot (NYSE: GREEN DOT), which provides easy-to–access, low-cost banking services through retailers like Walmart.
- Walmart, which provides a wide variety of low-cost banking and financial services through its stores.
- Money transfer company Xoom (NASDAQ: XOOM).
- Apple, which provides banking services through Apple Pay.
- Companies like Google Inc. (NASDAQ: GOOG) and PayPal are experimenting with alternative lending and financing for businesses.
Another way that you could take advantage of those underserved by banks is to make alternative loans through peer to peer lending services like Lending Club or Prosper. These companies allow individual investors to underwrite loans to small businesses, consumers, and others that cannot get traditional financing through banks. Lending Club recently made a deal with Google to finance purchases of Google software. Uber and automakers such as GM are also making vehicle loans to ride sharing drivers.
Quick serve or next generation fast food restaurants. These sell high-quality, often handmade food and beverages at a low price. They profit from income inequality because they offer a low-cost luxury: good food. They also appeal to penny pinchers, who will feel guilty about buying something low quality, such as a McDonald’s burger, but smart for buying something handmade for $7. It is no coincidence that McDonald’s, home of the dollar menu, is struggling while these chains are booming:
- Chipotle Mexican Grill (NYSE: CMG) The burrito house sets the template here by offering a limited menu of high quality items at a reasonable price.
- Starbucks (NASDAQ: SBUX) Its coffees, pastries, and lattes are the ultimate low-cost luxury. Almost everybody can afford them.
- Dunkin Brands Group (NASDAQ: DNK) A working class alternative to Starbucks
- Whole Foods Market (NASDAQ: WFM) It operates cafeteria style restaurants that sell high quality meals at a good price but cleverly disguises them as supermarkets.
Another way to take advantage of income inequality is to invest in what those that benefit from income inequality—the rich, upper class, etc.—might buy. Some ideas here include:
- Luxury department store operator Nordstrom (NYSE: JWN), which has been one of the few success stories in its segment. Nordstrom’s TTM revenue grew from $12.53 billion in October 2013 to $13.17 billion October 2014. During the same period, Macy’s (NYSE:M) revenue fell from $28.08 billion to $27.94 billion.
- Luxury carmakers such as Tata Motors (NYSE: TTM), owner of Jaguar and Range Rover, Daimler (OTC: DDAIY), which makes Mercedes and Maybach, BMW (OTC: BAMXY), and Volkswagen (OTC: VLKPF), which owns Audi, Bentley, Bugatti, Porsche, Lamborghini, and Ducati motorcycles. Americans being Americans, the first they do when they make money is head to the car dealership.
- Harley-Davidson (NYSE: HOG) The venerable motorcycle manufacturer sells a product that has strong appeal to those most likely to profit from income inequality: middle-aged, college-educated white men.
One area I would stay away from is dollar stores like Big Lots (NYSE: BIG), Dollar General (NYSE: DG), and the new Family Dollar/Dollar Tree (NASDAQ: DLTR) combination. These companies simply lack the ecosystems and infrastructures to compete effectively with the bulk discounters. Another problem facing these retailers is that the incomes for these stores’ primary customers, the working poor, are falling.
The bottom line is that investors that do not understand the reality of the times that they live in are doomed to lose money. Understanding the big picture is vital if you want to make money in today’s America.
Disclosure: The author holds stock in Kroger (KR) and eBay Inc. (EBAY) and conducts retail sales through Amazon.com and eBay.