Earlier this month, WalMart (WMT, $73) and Macy's (M, $44) both reported quarterly financial results that disappointed Wall Street and set off a commotion among analysts and commentators, all of whom are thinking aloud about what this says about the health of the consumer and the economy. Reading the tea leaves for signs of economic strength or weakness has become the obsessive sport du jour because, of course, we might find some clues there as to when the Fed would start to taper its massive bond purchases. Given the amount of ink (liquid and digital) and airtime devoted to such divination, you would think that Ben Bernanke had left his job at the Fed to coach the Alabama football team. Perish the thought, though, because at least Alabama is probably going to win.
Meanwhile, Urban Outfitters (URBN, $42) and TJX Companies (TJX, $54) both posted impressive results. Granted, this is not a true apples-to-apples comparison, since WalMart and Macy's are general merchandisers while the latter companies are specialty retailers, but the distinction actually makes the divergence more compelling. As investors, we know how important it is to understand the big picture, otherwise known as the macroeconomic environment--we don't want to fall victim to failing to see the forest for the trees. However, the concern here may be the opposite, namely that we might fail to see the trees for the forest. The big picture matters, but stock-picking is also all about the little picture, the microeconomic situation unique to each individual company. To stretch the analogy a bit, some of those little trees will grow up to be big and strong, while others will be smothered by the shade canopy, also known, for our purposes, as the competition.
The stock market has been driven higher by lower interest rates, courtesy of the Fed, even as earnings growth overall has been nothing to write home about. Investors have been willing to pay more for each dollar of future earnings, because lower interest rates make each dollar of those earnings more valuable in terms of present value. If the market is going to continue its advance, better earnings will have to carry the ball from here on as interest rates inevitably edge higher. If that pass is successful, the market just might make it through the transition. The good news, as I see it, is that the same factors that would lead the Fed to taper decisively would be the same ones that pave the way for better earnings growth--namely, a more robust economy.
For some time now I have been hearing individual investors say that their investment money is in index funds or Exchange Traded Funds (ETFs). Now, when you put money in those funds the manager is going to buy the stocks in that sector or the stocks in a particular index. That approach has worked out well for some investors, at least to the extent that the rising tide of falling interest rates has lifted all boats. But that's not really stock picking, because you're getting just average companies along with some good ones. So what happens when the tide isn't rising anymore, when interest rates are not pumping up the market? My guess is that individual stock picking will be even more critical to investment success. We're actually seeing that now, as the better growth stocks have performed relatively well during this most recent bout of market volatility. As an example, we've seen weakness in housing-related stocks, the actual home builders in particular, as investors worry that higher interest rates could dampen the housing recovery. However, Ceasarstone (CSTE, $43), the Israeli maker of engineered quartz for kitchen counter tops and other surfaces, has seen its stock advance steadily, up some 170% since the beginning of the year. The reason? Great earnings that seem to indicate that their business is taking market share from more traditional sources of counter tops such as granite.
We could make a similar observation about Michael Kors (KORS, $73) and Starbucks (SBUX, $72), both of which seem to be grabbing a bigger piece of a pie that's not growing robustly. TJX, the operator of discount stores, is taking market share from the likes of Macy's and J.C. Penney, while Costco (COST, $113) seems to be eating into WalMart's business. And just this morning (Monday), Stratsys (SSYS, $112) and 3D Systems (DDD, $52), the makers of three-dimensional printers, are moving higher after both being initiated with Buy ratings at Citigroup. It's all part of the disruption that investors might miss if all they can see is the forest. As famed investor Peter Lynch (pictured above) once said, "The person who turns over the most rocks wins the game."
Judgment Day is coming, as the street preachers like to warn, but it's going to be a separation of the winners from the losers, the companies with stellar earnings growth being the winners. Aren't those the businesses you really want to own? I welcome the return of a more serious focus on stock picking, because that is how individual investors can really gain an edge, if they do their homework and have good sources of information and research. Maybe if General Douglas MacArthur had been a stock picker instead of a military hero, his quote might have been, "Old stock pickers never die; they just fade away." Let's hope they really are coming back.
Life is short. Get busy.
Jim
Disclosure/Disclaimer: My family members and/or I own shares of URBN, TJX, CSTE, KORS, SBUX, COST, DDD, SSYS. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.
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