Don Draper, my favorite fictional philosopher and main character on Mad Men, recently offered the following insight: "What is happiness? Happiness is that moment before you need more happiness." Other philosophers, maybe no more thoughtful but probably less cynical, have reminded us that happiness is not about getting what you want as much as it is about being content and satisfied with what you have. Such a contented state of mind and soul, of course, requires packing away one's troubles and worries--along with the awareness of what one lacks and desires--in order to accentuate the positive. Or, as our grandmothers used to tell us, to count our blessings. Don was astute in calling this a "moment," because what is packed away has a tendency of escaping its confines and creeping back into consciousness. Keeping the kudzu out of our garden of delight requires persistent and diligent effort. I consider myself a positive person, but long term my money is on the kudzu.
The equity markets had such a moment in the first quarter of this year, continuing an uptrend that started in the final months of 2011. For an extended moment, the worries about budget deficits, looming tax increases, the European financial crisis, and our own lackluster recovery seemed to be packed away. The market's behavior over at least the past year has been a reflection of how and when those worries are unpacked and brought back into consciousness. The expanding lexicon of market prognosticators has given us the terms "risk-on" and "risk-off" to describe this alternating flow of money between stocks and bonds. When the worries abate, risk is on as investors buy stocks and sell bonds, pushing bond prices lower and yields higher. When the worries return to center stage like a persistent debt collector, investors sell stocks and head to the perceived safety of Treasury bonds, giving us the record low yields in the bond market. The mid-point of 2012 is looking a lot like the same time in 2011 as this pattern continues. As another philosopher, Yogi Bera, put it, it is "deja vu all over again."
What we want to do here at this mid-point of the year is to look beyond the big picture for a more complete check-up on how some of our trends are playing out. For a benchmark/ frame-of reference, we'll note that as of today the S&P 500 index is up about 4.5% for the year. Whole Foods Market (WFM, $93) is up 34% year to date and continues to justify its premium valuation by exceptional execution. The stock obviously fits with our "healthy eating" trend, but it also is part of our "Tale of Two Cities" theme for the economy. Consider that grocer Supervalu (SVU, $2.71) is down 66% so far this year, with the majority of that decline coming this week. If you had been enthralled by SVU's juicy dividend yield, the cautionary tale here is that the company has now suspended its dividend payments. That is why we should consider very high dividend yields as a sign of trouble, not of health--SVU's dividend was not even covered by its earnings. The woes of SVU are part of a larger middle-market malaise, with the middle shrinking as high-end consumers gravitate to the premium offerings at Whole Foods, while struggling consumers flock to the consistent bargains on WalMart's grocery aisles. Best of times, worst of times.
We have consistently favored the discount stores overall, with Dollar Tree (DLTR, $52) up 25%, Ross Stores (ROST, $67) up 42%, and TJX Companies (TJX, $44) up 36%, all year-to-date. Meanwhile, middle-market player J.C.Penney (JCP, $20) has fallen 42% so far this year. When we first analyzed this bifurcation of the economy, we were able to point to some of the high-end retailers as supporting their part of the "best of times" piece of this thesis. With the most recent bout of unpacked global economic worries, however, luxury goods companies such as Coach (COH, $56) and Ralph Lauren (RL, $140) are down 7% and 1.6%, respectively, year-to-date. It is important here to make distinctions between these companies and Whole Foods. First, Coach and Ralph Lauren reside in the consumer discretionary sector, meaning that consumers can postpone purchases of new handbags and polo shirts. Whole Foods lives in the consumer staples sector, and people who have become accustomed to the organic offerings at WFM are not as likely to switch to buying discount turnip greens at Target. Second, a big part of the investment story for those luxury retailers is their expansion in China and other overseas markets, and that is precisely where the global growth concerns started.
One of the best-performing stocks on our Radar Screen has been Hain Celestial Group (HAIN, $56), up about 54% since January. HAIN makes many of the organic and otherwise healthy food products that line the shelves at Whole Foods. And while energy drinks may not belong in the health food category, shares of Monster Beverage (MNST, $73) have risen 58% this year. The common thread here is specialty retail, and we've also seen strength in nutritional supplements retailer GNC (GNC, $39), up 35%, and PetSmart (PETM, $69), up 34%--people will always spend money on their pets and children. Shares of Lululemon (LULU, $56) have been hit with profit-taking, bringing their gain for the year down to a still-respectable 20%. Elsewhere, Cerner (CERN, $81) has continued to benefit from the trend towards adoption of its electronic health care records systems, gaining 32% in the first half. Fertilizer maker CF Industries (CF, $195) has gained 34% in 2012, with recent strength attributable to concerns over the drought and corn crop. Biotechnology stocks Alexion Pharmaceuticals (ALXN, $97) and Biogen Idec (BIIB, $143) have returned 35% and 30%, respectively. Shares of generic drug maker Watson Pharmaceuticals (WPI, $75) have given investors a 25% return.
When we put all of this together, we see a relatively narrow group of companies that have done well for investors in spite of the gyrations in the overall market. Success has come from carving out a niche that fits well with a strong broader trend, and I suspect we will see that hold true for some time to come. Does that mean that these stocks are a safe haven in a major market downturn? Absolutely not. In fact, in the true spirit of "the bigger they are, the harder they fall," the biggest winners may be the most vulnerable to profit-taking when things really turn nasty. The point, though, is that this market has been one of major moves up, as in the first quarter, followed by some harrowing declines, then a return to some advance. The end result is that the market appears to be stuck in neutral, going nowhere, bereft of a real trend.There is no market trend to follow, so you have to be exceptionally good at picking the right stocks. For the time being, the market will want to move up when it can ignore the gathering storm of economic problems, but ignorance makes for only a fleeting bliss.
In those moments when investors have packed away the world's problems, what do they see? When Europe's woes and tax hikes are locked in the closet, out of sight and out of mind, what does this happiness look like? It is a world where corporations have become much leaner with their expense structures and are sitting on hoards of cash. Interest rates are so low that about the only return you get from bonds is your money back, probably with diminished purchasing power. So, it seems perfectly reasonable to put some money at work in the risk trade by investing in equities. It makes sense to own a piece of some American businesses that are making good money doing some exciting things. No risk, no reward. No guts, no glory. This is how it has always been, how money is really made in America--not by loaning money, but by owning something. See, it didn't hurt a bit to buy those stocks. But wait.... something is rattling in the closet, and it wants to get out.
Life is short. Get Busy.
Jim
Disclosure/Disclaimer: My family members and/or I own shares of WFM, DLTR, ROST, TJX, COH, RL, HAIN, MNST, GNC, PETM, LULU, CF, ALXN, BIIB, and WPI. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as advice to buy or sell any security.
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