The “Trump Bump” will soon come to an end, and earnings will once again drive stocks higher or lower. Bulls think 2017 S&P operating earnings could hit $130 per share. Who knows if this happens? Even in times of relative stability, it’s foolish to predict the markets—and probably the only thing everyone can agree on these days is that our current situation is far from stable. There are too many variables, including uncertainties about the policies President-elect Trump will put forward, to have any clue where the market will wind up at year’s end. Will Trump succeed in cutting the corporate tax rate or start a crippling trade war with China? Will he “repeal and replace” the Affordable Care Act or throw the whole healthcare sector into chaos? Your guess is as good as mine, and anybody who claims to know is probably a partisan hack or a salesperson, or both.
One thing we can be sure of is that, as always, a handful of big movers will disproportionately impact the indexes in 2017. Last year Nvidia was that stock. I wish I knew what this year’s breakout name will be, but all I can offer with some certainty is that even if the indexes post another year of low double-digit increases, more stocks will struggle than flourish. Quite a few businesses could vanish altogether. Avoiding these laggards and soon-to-be zeroes is just as important to investing success as scouting for potential five or ten baggers. And one of the best ways to do so is to identify larger secular trends.
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Two of the roughest, most failure-prone sectors in the stock market have always been—and probably always will be—restaurants and retail. Competition is brutal in both spaces, margins are usually slender, and bankruptcy always seems to be one poor management decision away.
I’ve written about the slow-motion train wreck of the traditional retail sector fairly regularly over the last couple of years, and with several large operators like Nordstrom’s and Kohl’s posting surprisingly decent earnings lately, I thought it might be a good time to check back again. Could brick-and-mortar retail be on the brink a comeback?
As last year’s holiday season was kicking off, I cautioned investors for the second year in a row to beware of the traditional retail sector. Since then, things have gone from bad to worse. This earnings season has been an unmitigated disaster, with one retailer after another turning in disappointing reports. Gap, Nordstrom, Macy’s, JC Penney, Kohls, and others have all dropped precipitously.
Some contrarian investors who buy out of favor stocks in out of favor industries have started calling a bottom for these companies, positing that the recent selloff provides an attractive entry price for long term investors.
After last year’s better-than-expected holiday season, I cautioned investors not to get too hopeful about the seemingly endless supply of retailers looking to rebound. With local stores starting to put up Christmas lights again, it seems like a good time to revisit that advice and check back on the sector. How has retail fared in 2015?
Pretty much the same as 2014, 2013, 2012, and just about every year for the last decade. That is to say: quite poorly.
First, some welcome good news during what has been a gloomy start to autumn: Publishers Weekly gave my forthcoming book Dead Companies Walking its first review–and it was very positive. Here’s an excerpt:
Hedge fund manager Fearon shares his take on why companies fail in this surprisingly entertaining mix of business guide and memoir. Fearon … isn’t shy about revealing some of his financial missteps … But, as he insists, his mistakes—and his observation of others’—have helped him recognize key warning signs of a company about to tank … The final takeaway of this spirited book is that “learning to love failure all over again” can help America recover the adventurous spirit that Fearon believes our economy needs.
The book’s two main messages are that failure is far more common in business and investing than most people want to admit and that even very smart people sometimes make very dumb decisions. As I readily and repeatedly admit in the book, I’m no exception. I’ve made plenty of boneheaded mistakes as an investor and a businessperson. And, apparently, I’m not done making them. This week I goofed big time.
Last Wednesday, I published an article on Seeking Alpha praising the retailer J.C. Penney (ticker: JCP) and discussing why I covered my previous short position and bought a six figure position in the company. Today, at the company’s analyst day, management lowered guidance for same store sales growth for the upcoming 3rd quarter. Its stock promptly cratered. By day’s end, it was down just under 11 percent. Oof. That’s embarrassing–and expensive. Making matters worse, as I wrote last week, another stock in my fund–Trinity Industries–fell sharply after Jim Cramer predicted doom for the company. Add it up and I’m ready for October to be over already.
Bad runs are inevitable in investing. I’ve been through them before. The important thing is how you react to them. So, what am I going to do now? First, I’m going to stop crying. Then I’m going to do some serious thinking, and self-examination.
The talk of the investment world this past week has been the continuing soap opera at JC Penney. The latest installment has been the feud between board member and New York hedge fund manager Bill Ackman and just about everybody else within the company. Ackman, of course, was the one who convinced the board to hire former Apple retail guru Ron Johnson as CEO—a move that cost the company billions after Johnson disastrously tried to make the venerable retailer into some kind of glorified cross between Saks Fifth Avenue and Urban Outfitters.
After the company finally got rid of Johnson in May, Ackman agreed to bring back former CEO Mike Ullman on an interim basis. But that brief period of harmony vanished this week when Ackman publicly aired his displeasure with Ullman’s leadership. That move was the last straw for the board. They accepted Ackman’s resignation, calling his recent behavior “disruptive and counterproductive.”
Too which I say—”disruptive and counterproductive???” I know corporate boards tend to err on the side of decorum and blandness, but calling Bill Ackman “disruptive and counterproductive” to Penney’s is like calling an arsonist “disruptive and counterproductive” to buildings.
I shorted Penney’s seven months ago. It was a dead company walking then and I still believe it is a dead company walking today. And the person that mortally wounded it was the exact person who caused the latest trouble, Mr. Ackman himself. Ackman has been “disruptive and counterproductive” from day one at Penney’s, and even though he’s gone now, he’s left behind the torched shell of a once great company.