What It Means to Be a Stock Picker

 | Jan 27, 2012 | 9:30 AM EST  | Comments
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Stock quotes in this article:

nke

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jout

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ua

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dks

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aapl

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goog

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coh

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RTH

Before recording this week's video for Options Profits with Jill Malandrino, she dropped the classic line, "It's a stock picker's market." As luck would have it, that remark popped up again in one of the videos we produced, and I had to think quickly to explain what being a stock picker is all about. I said that it's the process of avoiding big pops and big drops in a stock before an event of any kind.

But being a stock picker is not as clear-cut as that. To decipher whether events are good or bad, there has to be a deeper understanding of business trends and how they fit into the broader industry's dynamics. The rigorous analysis that goes into molding yourself into a successful stock picker is the primary reason to follow two basic investing principles:

  • Start with a sector that interests you and you understand.
  • Pick five large-caps, five mid-caps, and five small-caps from the sector of choice and make them your coverage universe, sort of how Wall Street analysts do it. These are companies you must know through and through to buy options on, go long, short, or whatever. As you become sharper, the financial reports and comments from these 15 companies will unearth clues for new stocks to add into the mix and replace those with stale investment theses.

Next week kicks off earnings season for the retail sector -- validation for the move in the Market Vectors Retail ETF (RTH) -- while January same-store sales and the employment report only make the environment that much more intense. Those inclined to invest in such a fickle sector, especially during earnings, have to don their stock pickers' hats very tightly.

First, let's run down the trends that have arisen from the early reporters.

  • Apple (AAPL) products continue to siphon dollars from traditional retailers.
  • No surprise that the weather hurt Under Armour (UA) sales and a backup in inventory caused management to curtail its annual outlook.
  • The underlying stocks are acting in accordance with the earnings releases (good reports send stock prices higher and vice versa).
  • Coach (COH) had an 8.8% same-store sales increase and the stock ripped. Overlooked were soft sales for bags priced above $400.

It's a valid exercise to profile two companies from my expansive coverage universe, Nike (NKE) and Johnson Outdoors (JOUT), to give a flavor of the factors that should be looked for as a stock picker. To be up front, I am not a fan of Johnson Outdoors, but I do support Nike, in spite of its supercharged run through $100.

Johnson Outdoors

There was a monster move higher for this stock in just four-weeks, but what really caught my attention was the stock's inability to clear its Oct. 26 high and the appearance of selling on the way up in the past week. Fundamentally, the outdoor-recreational-products maker does not excite me because its discretionary products compete with pricey tech gadgets from Apple, Google (GOOG) and a host of items found at Dick's Sporting Goods (DKS).

Its military business has fallen off the map, as to be expected given the recent troop pullouts, and the Marine segment has been the sole driver of sales growth. Volume in the other units (cold-weather gear, watercraft and diving) was weak throughout 2011. Also casting doubt on the stock's ascent, a key retailer, Cabela's (CAB), has begun removing unproductive lines from its stores and reining in promotions, risking further loss of business -- and there are indications that this has already happened. Shorting Johnson Outdoors into earnings next week is risky, but may be potentially rewarding.

Nike

On the other side of the spectrum is Nike. Although Under Armour cited weather when it tempered its annual revenue outlook, it is a quiet acknowledgement of increased competition in the revised forecast. Nike is executing on performance gear about as well as I have ever seen, and is getting better product placement at Dick's, which is where Under Armour calls home base.

On top of this, 58% of Nike's revenue is international and the sneaker maker is not experiencing weakness outside the U.S. (as opposed to other retailers), whereas Under Armour is only a small player overseas. Toss in Nike's brand for the London Olympics and World Cup in 2014 and 2016, and a $108 stock could be north of $125 within six to 12 months.

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