The Day Ahead: Cray Cray

 | Mar 15, 2013 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

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amzn

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jwn

Ten days in a row, baby! Break out those dusty darts last used in 1999 and start throwing them around -- we can't miss with any call right now. To be honest, it's a bunch of craziness fueled by the meddling in the free market by an institution with its set of rules.

So much for my humble advice at midweek to de-risk the portfolio a bit. What a silly thought it was to actually pay attention to stretched valuations and things deemed negative. Make no mistake, however: The combination of the February employment report and the advance in the market that could be predicting surprising second-half economic growth sets the stage for a slightly less dovish Fed Chairman at his upcoming first 2013 press conference. Tread lightly, stock-picking studs and goddesses.

Since the market may never go down again, why not zero in on specific stories? Here are two that come to mind.

Amazon: Cool Company, Dog Stock

JPMorgan dropped its rating on Amazon (AMZN). Here were some easy-to-understand comments from my "negative on Amazon" note in mid-February.

  • More smartphones, more price discovery, a realization that in fact Amazon is not the lowest possible price on every piece of merchandise. The likes of Wal-Mart (WMT) and Target (TGT) are investing in lower prices through their websites, overall assortment and speed to market (online orders are handled at the store level ... a worker picks a shirt off the rack and ships it). Also keep in mind that Best Buy's (BBY) recent quarterly numbers signaled that it is having some initial success in changing how consumers think about its product prices.

Talking point: For the first time in a while, Amazon is being attacked.

  • Lack of transparency to investors is a major overlooked issue here. Amazon's earnings calls and 10-Qs are unrevealing. Amazon is not releasing the type of information to investors that builds and maintains confidence (especially at present multiples).
  • Amazon's margins and returns (as reported -- none of this ex-item junk) are concerning. Similar to Wal-Mart, Amazon is investing in lowering prices, and although it is not opening stores, it is building enormous distribution centers. Lower prices + intense investment + weak core earnings = hard to justify the current valuation.

Talking point: The Street continues to hype the future returns of apparent ownership of all things retail on the part of Amazon, but it is not realizing that the returns today continue to fly in the faith of that rationale.

How to Play Rich People Making Bank in the Market

The only luxury goods stock that has truly outperformed the market's rise in the last four weeks is Tiffany (TIF) (up 10%), owing, I believe, to buyout speculation. I would avoid this stock into the upcoming earnings report. Sales and margins have been in a tailspin, and the initial 2013 guidance is unlikely to suggest that a material turn in the business is forthcoming in the next six months.

Is Luxury Back in the U.S.?

First, you have to separate luxury into three categories. The very top of the market, people who shop for Hermes bags every weekend, never truly went away, despite saying they did. The international consumer in U.S. flagship stores has been strong (specifically the Chinese consumer on U.S. vacations). The third group is the aspirational U.S. consumer. These consumers are researching product better than ever before, considering whether and how it adds value to their lives for multiple occasions or seasons. Then, once they decide to give the purchase a go, debit cards are focused on one store; credit cards are not being handed over to multiple stores.

Trends:

  • Broader lifestyle offerings (companies want to show the consumers that they need the handbag and Apple (AAPL) iPad case).
  • More elaborate department store shop-in shops (have to sell the sizzle).
  • Men's is still a very underserved market, and Coach (COH) is doing a nice job here.

Is This a Fleeting Trend?

  • I believe the U.S. aspirational luxury shopper lives in a perpetual state of fleeting. Meaning, at any sign of a change in wealth to the negative, he or she will pull back on purchases of luxury goods.

Winners: Nordstrom Instead of Saks

  • The market is assigning Nordstrom's (JWN) stock a much cheaper multiple relative to Saks (SKS) because the company is investing aggressively in what could be the luxury department store of the future. Now would be the time to buy into under-appreciation for future earnings. Dump Saks.

Loser: Tiffany

  • Time for a change at the top.
  • Margin sweet spot for the business (products priced under $500) is under attack from electronics goods competition and lower-end jewelers.
  • Weak assortment (no lifestyle).

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