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Last week I wrote about opportunities in the consumer discretionary sector, and why I like stocks of companies that sell lower-ticket items for 2014. I want to revisit that notion this week, with some critiques on some of the stocks I’m watching.
I use the Weiss Ratings Model to help me follow many stocks at the same time. The Model ranks companies’ fundamentals and stock-price performances to allow the cream of the crop to emerge as best bets for investors.
And one important item I use for making my stock choices is the difference between stocks’ Weiss Ratings and short-term price movement. That’s because I’ve found over the years that when stocks fall, yet retain buy ratings (any rating of B- or higher), they can make for some very profitable short-term investments, which is what I’ve noted with some stocks in the news this week.
In fact, the Model has identified several stocks of companies where prices have recently fallen, but where balance-sheet strength and cash-flow generation have trumped short-term sales weakness. And that’s where I think positions can be taken for near-term gains.
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| The fashion sub-sector can represent a good short-term play. |
The first stock in this category is Lululemon (LULU — rated B). The stock got creamed on Monday, after revealing that it expects fourth-quarter sales to range between $513 million and $518 million, down from consensus estimates of $535 million to $540 million. The same pullback in expectations was evident in pre-announcements from Express (EXPR — rated B-) and American Eagle (AEO — rated C+), which similarly sunk sentiment regarding short-term outlooks.
But the point here is that out of these three stocks, the highest-rated one, LULU, is still most likely to outperform the broader market over the next year or so. Therefore, as investors, we may be able to use price weakness as an entry point to a former market darling like LULU over the coming period, based on its combination of profit/cash flow growth and balance-sheet strength as our guides. That’s what the Ratings Model suggests on its face.
That said, from a fundamental (forecast) perspective, I would still avoid LULU for the long haul. Short-term traders should take a signal that this highly rated stock is resilient to short-term earnings guidance, and should rebound — based on the solidity of the results it has managed to produce over the past few years. However, as a long-term investor, I don’t like to bet on fashion trends — of which, yoga/Pilates clothing, such as that sold by Lululemon, represents a prime example.
Yes, fashion is fickle. So when I’m looking for investments in the retail space, I generally avoid the more specialty retail names. I am more likely to look at more conventional retailers as purchase candidates for my portfolios.
Even retailers that are technically considered to be specialty retailers, like TJX (TJX — rated A+) and Foot Locker (FL — rated A+) from last week’s issue, can be included in this cadre, though. The reason is that we have seen a trend toward consumers’ preferences for off-price retailers, and because I consider Foot Locker to be a “category killer,” which makes it attractive.
For the most part, retailers report earnings with a fiscal-year end in January, due to the enormous percentage of sales that occurs at the end of the year. So next month we’ll get a rush of earnings reports.
From what I’m seeing, American consumers are still willing to spend more than they make. And I’ll keep my eyes open for opportunities (such as the ones mentioned above) for immediate investment.
Best wishes,
Don
P.S. I’ve taken these ratings to the next level: Not only do I use them to create a “buy list” of stocks, but I’ve also developed an exclusive Early Warning System —a way to use our ratings as a powerful INDICATOR of where the market is going! The ingenious discovery behind this approach is revealed right here.
