Think Big by Investing in Small Town Ideas
June 10, 2021
Early on during the pandemic, work-from-home stocks such as Microsoft (NASDAQ: MSFT), Twilio (NYSE: TWLO), and Zoom Video Communications (NASDAQ: ZM) enjoyed tremendous success. It doesn’t take an expert analyst to understand why. As workers began logging in at home instead of making a daily commute to their workplace, these platforms allowed several employees to complete most, if not all, of their job duties from the comfort of their homes. As meetings and calls were taken on Zoom and team projects were completed using various collaboration software tools, corporations and workers alike began to evaluate if they ever needed to return to the office, even after the pandemic was over.
While most offices are returning to “normal” or adopting some hybrid work schedule, many workers will be continuing remotely. A recent survey from Upwork (NASDAQ: UPWK) revealed that as many as 14 to 23 million Americans are planning to move due to remote work, making near-term migration rates triple or quadruple from what they usually are. The same survey found that more than 20% of those planning to move currently lived in a major city. The most prominent reason people moved was to seek less expensive housing, as 52.5% of those surveyed said they wanted to find a house significantly cheaper than their current residence.
If people are leaving big cities and suburbs to seek more affordable housing, where might they be going? A 2018 Gallup poll might give us a hint. In that poll, 27% of respondents said they wanted to live in a rural area, scoring higher than any other option. Not only did more people say they wanted to live in a rural area, but only 15% resided in a rural area at the time of the poll, giving the rural area category the most significant gap between those desiring to live there and those who already did.
While not precisely rural markets, real estate prices in lower-tier markets indicate that people are looking for alternatives to major metropolitan centers. For example, in Allentown, PA, housing prices had increased 24% year over year in January. In Martin, TN, a town about 150 miles outside of Nashville, the median home prices had jumped 159% over the same period. In Kendallville, IN, house prices were up 56%.
These surges in prices have led to the rise of Zoom towns, a play on the words Zoom and boomtown, a term meant to describe a community that has seen a surge in population due to remote work.
3 small town stocks to watch
With remote work a modern reality, this doesn’t seem to be a trend that will end any time soon. If this proves true, how can investors play this migration trend from larger metro areas to less populated communities? Here are three companies investors might want to watch:
- Casey’s General Stores (NASDAQ: CASY) is a chain of almost 2,200 gas station convenience stores across 16 states, mainly in the Midwest. The chain found success by opening in locations in small towns in Iowa and has largely stuck to that formula. Even now, more than 57% of its sites are in communities with a population under 5,000, and only 17% of Casey’s stores are in communities with a population greater than 20,000.
While Casey’s revenue declined by 10.6% in its third-quarter results, total sales are not the best way to measure its success, as fuel price can wildly affect its top-line. Instead, the best metrics to look at are its earnings and inside sales, defined as the prepared and packaged foods it sells inside its stores (its pizza is especially popular). Its earnings per share (EPS) rose to $1.04, a 14% increase year-over-year. In addition, Casey’s inside same-store sales rose 2.1% over last year’s third quarter, and its prepared food and fountain category’s margin cleared 60%. Casey’s is the fourth-largest convenience store chain and fifth-largest pizza chain in the U.S. and now has more than 3.3 million members enrolled in its rewards program.
- Dollar General (NYSE: DG) operates an incredible 17,426 stores across the U.S. as of April 2021. A glorified convenience store of sorts, the chain has grown from its humble Kentucky roots into a retail powerhouse by offering thousands of locations in towns that are generally too small to support a major grocery store or retail superstore.
Aided by changes in consumer behavior driven by COVID-19, Dollar General enjoyed a banner 2020. Sales rose to $33.7 billion, a 21.6% increase over 2019’s results. The company’s EPS jumped to $2.62, a 24.8% increase year over year. While sales growth was driven higher by the pandemic, it was hardly something new for Dollar General: 2020 marked the 31st consecutive year of same-store sales growth.
After repurchasing $2.5 billion of shares in 2020, the company’s board authorized an additional $2 billion of buybacks for the 2021 fiscal year and increased its dividend by almost 17%.
- Tractor Supply (NASDAQ: TSCO) bills itself as the “largest rural lifestyle retailer” in the United States. The company operates almost 2,000 locations in 49 states, where customers can find everything they need to care for their “farms, ranches, home, and animals.”
Tractor Supply was a direct beneficiary of consumers escaping to the great outdoors during the pandemic. In the first quarter, sales rose to $2.8 billion, a 42.5% increase year over year, and were primarily driven by a 38.6% increase in same-store sales. The company’s online sales increased by triple digits for the fourth consecutive quarter.
Tractor Supply opened 21 new locations in the first quarter, with a long-term goal of reaching 2,500 total stores in the U.S. The company believes it can repurchase between $700 million and $800 million of shares in fiscal 2021 and supports a dividend yield of 1.15% at current prices.
Matthew Cochrane is a Lead Advisor at 7investing, a stock recommendation service that encourages individual investors to adopt a long-term mindset. We transparently report the performance of all past and present recommendations. You can see our cumulative, real-time performance at any time, but only subscribers can see the stock-by-stock breakdown.