A good defensive pick

Dollar General (NYSE:DG) is a US-based discount retailer that operates more than 20,000 stores, mainly in small towns and rural communities. Over the past year, the stock has soared by 46%, but importantly, the P/E ratio sits at 17.51, well below the index average.

Its business model is built around offering a wide assortment of low-cost household essentials, packaged foods, cleaning supplies, health & beauty products, and apparel basics. This makes it a defensive retailer, as demand for low-cost essentials tends to hold up even in tougher economic conditions.

Aside from just the attractive valuation, I think the stock looks appealing right now for other reasons too. For example, Dollar General has been taking steps to improve margins and store efficiency, while also expanding into fresh food and healthcare offerings that can drive higher traffic and repeat purchases. The latest quarterly results, released last week, showed that these steps are translating into improved earnings.

Net sales increased 5.1% versus the same period last year, with operating profit up 8.3%. This shows momentum is with the business. It could also help to push the share price even higher over the coming year. If earnings tick higher, the current P/E ratio doesn’t indicate to me that we’re in danger of it becoming a bubble any time soon.

One concern is that if the US economy starts to boom, in part due to faster-than-expected interest rate cuts, Dollar General could see lower demand as customers feel more confident spending money in more high-end stores.

A top-tier banking giant

Another idea is Morgan Stanley (NYSE:MS). The stock has a P/E ratio of 17.04, with the share price up 50% over the last year. The stock has benefitted over this time period from a mix of improving macroeconomic conditions and company-specific strengths.

For example, stock markets have rallied, boosting asset management fees, while a pickup in capital markets activity (like IPOs and debt issuance) has helped its investment banking arm recover from the pandemic lull. At the same time, wealth management inflows have been strong, reinforcing the firm’s strategy of focusing on stable, fee-based income.

Even with these positive factors, I think the stock has room to run higher over the coming year. I feel global markets are going to continue to be volatile, boosting earnings from the trading division. Demand for advisory services and wealth management is also likely to keep increasing, meaning that income from this area should be strong.

I do feel that interest rates in the US are likely to fall sharply over the coming year. This is a risk for the bank, which will experience a lower net interest margin as a result. Yet given the other areas of the business should perform well, I feel this negative impact can be offset.

I think investors can consider both US stocks as options when looking for better value in the S&P 500.

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A lot of the time, this can be because a business is facing some short-term difficulties. And I think this could be the case at the moment. 

US consumer slowdown

Earlier this week, the CEO of Dollar General issued a troubling update. According to the company, its customers – typically US households with annual incomes below $35k – are under pressure financially.

The report revealed that many are using credit cards to pay for basic needs. On top of this, around 30% have a credit card that has reached its limit and 25% anticipate missing a payment in the near future.

Interestingly, though, households with higher incomes don’t seem to be feeling the same pressure. While they’re conscious of their spending, they aren’t actively trading down as much as they might be.

That’s bad for Dollar General, whose stock fell by around 33% on the news. But it gives investors like me something to think about when looking for stocks to buy in September.

Long-term investing

A weak consumer means short-term profits are likely to be lower than anticipated for a number of companies. And one of these is Dr. Martens (LSE:DOCS). 

The company is listed in the UK, but around 37% of its revenues come from the US. And it targets the kind of consumer that Dollar General identifies as being cautious, rather than endangered.

Operating in an industry where consumers can easily switch to cheaper alternatives can be risky. And the business has been struggling lately, which has caused the share price to fall. 

Management is suggesting that a recovery could take some time. But I think Dr. Martens has two important attributes that could make the stock a good long-term investment.

Surviving and thriving

The first thing a business needs during a difficult time is a strong balance sheet. This is what allows it to make it through a crisis to the other side – a necessary condition of future success.

Dr. Martens does have this. With around £368m in net assets, the company should be able to survive for the foreseeable future even if profitability is depressed for some time.

The other important asset is a strong brand. This should help keep the company relevant in the minds of customers when they find themselves in a position with greater spending power.

Again, this is something Dr. Martens has. Its boots are well-known for quality and durability, making them popular when consumers feel able to spend money on premium footwear.

Investing £1,000

According to its management, 2025 is going to be a transition year for Dr. Martens, before things improve in 2026. Any investment therefore needs to be made with a long-term view.

For someone looking to invest £1,000 each month, though, this could mean there’s a chance to build a significant stake before prices recover. I think that could be well worth considering.

Whether it’s Dr. Martens or a different stock, though, I’m looking for shares that are trading at an unusual discount. That’s where I think I’m likely to find the best opportunities.

The post Here’s how I’d invest £1,000 in a Stocks and Shares ISA in September appeared first on The Motley Fool UK.