The Day Ahead: Your New World

 | Mar 12, 2013 | 8:00 AM EDT
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How's it goin? I hope well. Listen here, given that the market has morphed into a Buffett owned Burlington Northern Santa Fe speeding locomotive, valuations on stocks have become less tastier than three months ago. So in doing your relative analytical comparisons by sector and by stocks, there is a strong possibility that the majority of the homework involves looking at overvalued investment candidates simply because the broader market has lifted the seas.

"What to do? What to do?" You wonder in order to find that not so cheap security amidst a crop of priced-for-perfection veggies.

I'll tell you my course of action: begin to evaluate the executives at the top pulling in a $500,000 annual salary and all sorts of perks hidden in the proxy statement.

"But, Soz, I always do that research," you say.

No you don't. Reviewing the executive team isn't even a bullet point on your to-do list as there is an infatuation with historical numbers and Elliot Wave Theory. Hey, maybe I am completely off base, and you, in fact, do deep research dives on the C-suite... by using the same tired nonsense spewed in 120 year old investment books.  Let me provide a reality check on the topic:

  • Reviewing earnings from 2001 to 2012 on a company, assuming naturally the CEO and the rest of the team have been around for the period, borders on a monumental waste of time. The market lives in the now, and circumstances from 2Q04, whether company specific or macro, I guarantee are vastly opposite of 1Q13. Remember, there are new stories to be considered in the market on a weekly basis that go lost inside an outdated SEC filing.
  • How an executive acted in the past may mean nothing on how they act in the future... seeing as the year-end bonus is higher thanks to prior period performance. Motives change along with the payout and if you don't believe they do, think again.

Note: One of the few exceptions to this reality check is Stanley Black & Decker (SWK). The company's executive team has been in place for a while and executes consistently in terms of acquisition analysis, integrations and cash allocation. This is a team with a blueprint for success and rarely deviates from it.

How I am evaluating management these days is detailed below. Running down this list in your head when undertaking research efforts is very important, especially in this new world of re-inflated asset valuations.

Did the company save the dividend hike to after the fiscal cliff resolution instead of pulling it into December to save shareholders an increased tax bill?

I view this delayed announcement favorably as it signals a generally pleased shareholder base, either due to a solid financial/stock price showing in 2012 or well defined growth initiatives, or both.

Of the companies in your peer comparable matrix, who has outlined the largest percentage change in 2013 compared to 2012 in capital expenditures?

Although this may weigh on earnings power and free cash flow in the near-term (great example: Nordstrom (JWN), which is reinventing luxury department store retailing through a significantly stepped up investment pace in 2013), it will prove beneficial come 2014 as the tardy investing companies (who are collectively worried about "uncertainty") realize they fell behind in the race to win. Nordstrom's earnings stand to accelerate in 2014, whereas competitors that didn't get it in 2012 will make that year an investment year.

Which company has loaded a bunch of products/serves designed to drive sales/profits into the first part of 2013, complimenting wins in 2012?

I want exposure to companies that have hit the ground hard in 2013 amid higher household net worth and indications of animal spirits in the U.S. economy.

PetSmart (PETM) fits the bill. The stock should be on one's watch list, there was an overreaction by the market to the latest earnings report. From my vantage point, Petsmart has loads of new high margin products about to arrive for consumers to enjoy, in addition to initiatives underway to extract efficiencies from operations and inventory.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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