I hesitated to write about this trend. It's disturbing. Many of its facets are also politically charged. But as an investor, I have to avoid politics. There's no money to be made by laying blame or opining about what should be. My only job is to find strong trends that support an investable idea.
I'll get to Amy's "investable idea" in a moment.
First, some background ...
Four out of five American adults struggle with joblessness, near-poverty or reliance on welfare at some point in their lives. That's what The Associated Press reported in late July, based on what it said was exclusive survey data.
This report came on the heels of a July 17 Gallup poll showing that a fifth of two-parent households in the United States said there were times during the preceding 12 months when they struggled to afford food. Among single-parent households, the portion of those reporting food-affordability problems soared to nearly a third.
Against that backdrop, it should come as little surprise that nearly 1 in 6 Americans receives food stamps.
What may be surprising, however, is that food-stamp use as of June was up 2.3% from a year earlier to nearly 47.8 million participants.
That's right. Even as the unemployment rate has dropped and as a number of other economic indicators have steadily improved since the recession, the number of food-stamp recipients continues to climb.
Source: Stock of the Month, based on U.S. government data.
One reason for the apparent discrepancy: the swelling of the ranks of the "working poor."
As Amy pointed out in the current issue of Stock of the Month, the number of jobs in the low-paying food-and-drink service sector grew 21.3% in the past 10 years, while other jobs increased by just 3.2%.
In 2010, 26.9% of fast-food workers participated in the food-stamp program (which, since 2008, is officially known as the Supplemental Nutrition Assistance Program, or SNAP). Since then, Amy wrote, "the minimum wage hasn't changed, (but) the ranks of fast-food employees have grown."
Moreover, according to Amy, 284,000 college graduates -- some with advanced degrees -- worked in minimum-wage jobs last year. That's up 70% from a decade ago.
Wherever there's a societal or business trend in the making -- however troubling -- chances are someone stands to benefit. And toward that end Amy looked to the administration of the food-stamp program itself for her investable idea.
You see, just as the numbers of SNAP users -- and their profiles -- have changed over the years, so has the "stamp."
The nation's largest food assistance program has its roots in the Great Depression in the 1930s, when the government issued blue stamps to subsidize the cost of food that was in surplus. After an 18-year hiatus, the idea was revived in the 1960s, expanding into a permanent program that sold discount food coupons to low-income people. In 1977 the government began distributing food stamps to the poor for free.
A writer for the Las Vegas Guardian Express recently called the EBT cards "the American Express card of the 21st century."
Amy recently called them the basis for her September "Stock of the Month."
Here's more from Amy...
Bob: There are only three companies involved in the administration of the EBT cards used for SNAP and other government assistance programs. You focused on the least well-known of the three. Who's your pick, and why?
|Stock of The Month|
Amy: Both JPMorgan Chase (NYSE: JPM) and Xerox (NYSE: XRX) administer EBT programs. But I chose Fidelity National Information Services (NYSE: FIS) because this business is right in its wheelhouse and it's in a position to gain market share.
In its Sept. 2 issue, Forbes Magazine published a list of what it considers to be the world's most innovative companies. Alongside tech giants such as Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) is Fidelity, the world's largest provider of banking and payments technologies.
Fidelity currently has the smallest number of SNAP state contracts of the three providers. Most of these are legacy contracts that eFunds secured before it was acquired by Fidelity. But now as part of a larger corporate entity, Fidelity has the clout to be a bigger player, primarily at JPMorgan's expense. For instance, on Sept. 16, Fidelity will start administering Florida's SNAP program, which previously was a JPMorgan contract.
Bob: In making the case for Fidelity in Stock of the Month, you refer to a "wave of SNAP recipients to come." Who are they?
Amy: Older Americans, those age 60 or older. The average monthly Social Security check for a retired worker is $1,269.38. The average monthly Social Security check for the spouse of a retired worker is $633.27. The median retirement savings of all households nearing retirement is just $12,000. Even for households with a designated retirement account, median savings are just $100,000 for the soon-to-retire. All in all, it's not an encouraging outlook.
Roughly 3.8 million people age 60 or older currently receive SNAP benefits, but many more are eligible.
Overall, nearly three-quarters of people who qualify for SNAP apply for benefits. Yet only one-third of the qualifying elderly apply for SNAP. The reasons for this are varied. Many people who are retired and collect Social Security assume they don't qualify. The older generation also tends to assign more of a stigma to public assistance programs. But as more of their friends and family members participate in the program, baby boomers are starting to view SNAP as one more tool they can use to make ends meet.
The elderly are also the fastest-growing segment of the population. The number of those 60 years old or older will grow from 59.5 million in 2012 to 74.8 million in 2020.
Bob: To what extent will the upcoming congressional debate over food-stamp allocations likely affect the participation or allocation rate -- and, by extension, the fortunes of the companies involved in the administration of the program?
Amy: Companies that administer SNAP are affected more by the number of participants than the actual benefit amount. There are likely to be some eligibility cutbacks when the Farm Bill comes up for debate, primarily related to work requirements for working-age adults without children. But the potential participation impact from this change will be more than offset in the near future by the growing ranks of minimum wage workers and the elderly.
Actually the biggest legislative change that could reduce SNAP participation is an increase to the minimum wage. While that issue has been raised, it has yet to gain traction in Congress.
Bob: What else influenced your decision to go with Fidelity as your "Stock of the Month" for September?
Amy: I've been encouraged by recent economic data out of Europe. If Europe begins to stabilize, I think that will be a big plus for the global economy. That's another reason why I think Fidelity is an appealing opportunity. Roughly 20% of Fidelity's revenues come from its International Solutions Group, which provides banking and financial software and consulting services. Financial institutions in Germany, Brazil, the United Kingdom and India are Fidelity's primary international customers.
Another trend I've been tracking is the growth of mobile banking. A recent study by Juniper Research projected 550 million people worldwide will use their smartphones for banking by 2016, up from 185 million in 2011. In March, Fidelity completed its acquisition of mFoundry, a company that specialized in mobile payment systems for financial institutions and retailers.
Fidelity has made a number of smart acquisitions of leading-edge payment processing companies. These technologies can now be better leveraged by Fidelity's scale and reach.
Unlike many other advisory services, I only profile one stock a month -- the single best opportunity I can find. To qualify, I have to be convinced that a number of trends and factors are working together to produce returns that outperform the market. I believe that Fidelity has that potential.