Generating Growth at Home — It’s Happening Right Now

by Mitchell Clark, B. Comm.

When you think about investing in a recession, you might think that your options are limited. But, no matter what’s happening in the broader stock market, there are always companies that are growing their businesses.

Fundamentally, the companies that are doing well in a recession are those that are able to generate top-line growth, not just earnings from cost controls. As we’ve seen so far this earnings season, all the large-cap companies are growing their earnings, not because business is good, but because management is good at keeping a lid on costs.

One very interesting company that’s doing well right now is PetMed Express, Inc. (NASDAQ/PETS). This is a company I’ve written about before and, when you consider its business model, it makes sense that the business is growing.

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This firm operates one of the most successful large- and small-
animal pet pharmacies and the vast majority of its business is done right over the Internet. In its latest quarter ended June 30, the company handedly beat consensus Wall Street estimates, with revenues growing 13% to 77.2 million dollars and earnings growing 23% to $8.1 million. Thirteen percent in top-line growth might not seem like much, but, in a recession, this is golden.

PetMed Express is increasing its reorder rate from existing customers and its online sales (which are very low-cost) grew 18% to 51.8 million dollars in its latest quarter.

The story of a company like this just makes sense in a recession. Any pet owner knows how expensive it can be keeping your cat or dog up-to-date with vaccinations and medications. The pharmaceutical aspect to a veterinary business is really profitable.

So, while a lot of companies are struggling in this recession, this company proves that if you have the right business model, you can grow successfully.

For quite some time, I’ve been writing about U.S.-listed Chinese stocks as the some of the most attractive growth drivers going forward. This continues to be true, but here’s another domestic company that’s growing its business and its stock price.

In a recession, one of the most stable customers you can have as a business is the government. A company called ArcSight, Inc. (NASDAQ/ARST) has proven that a business can be a great success even as the rest of the economy struggles.

This firm is in the business of selling information technology (IT) security to corporate and government customers. If you’re a big government department, you’ve got a lot of databases, files, servers, and network devices that need protecting. Some of ArcSight’s customers include: DISA (Defense Information Systems Agency), the U.S. Securities & Exchange Commission, the U.S. Federal Reserve, HealthSouth and the U.S. Department of the Treasury, to name a few. These are well-heeled customers, as you might imagine, and, in a recession, they’re golden.

In its latest quarter ended April 30 this year, ArcSight’s revenues grew an impressive 34% to 39.3 million dollars. Net income was $4.3 million, up solidly from a loss of $1.1 million generated in the same quarter last year.

A company like ArcSight tells a story that just makes sense, especially in a recession. So, what I know now is that there are still a lot of fast-growing companies in the marketplace. Most of these have businesses in China. But, it’s great to see that there are some domestic companies that are doing well at home in a recession. In any market, there are always good investment opportunities. In a recession, they’re just a bit harder to discover.