The Day Ahead: Go Forth and Conquer

 | Apr 09, 2013 | 9:13 AM EDT  | Comments
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Stock quotes in this article:

tol

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shld

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aa

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jcp

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m

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kmb

There is not a clue on what transpired in the market on Monday from a deeply profound perspective. That is okay, though. It's good to have a bigger picture opinion. Rumor has it that stocks waged a successful campaign against the building bear brigade and that suddenly the world is less full of macro landmines compared to last Friday.

Who knows? But this is the normal pre-earnings banter where stories are made from nothing and itty bitty reversals in the market are met with roaring enthusiasm or thunderous boos. Looking for hints on the approaching earnings from Alcoa (AA)? Your time would be better served perusing the recently published 10-K out of Sears (SHLD) -- much more interesting and a good exercise in staying analytically sharp. In my view Alcoa's report was an utterly useless telling on first quarter earnings.

Big Thought from Alcoa

Remember that the market has priced in upwardly revised fiscal year forecasts on the part of companies, as well as revenue beats (Alcoa missed, duh)! So to see Alcoa only reiterate its full year aluminum forecast after its typical earnings call sales job is a disappointment. It is a reminder to be checking the valuations on stocks you own relative to a reasonable set of forward assumptions. Now go forth and conquer.

Behind the Scenes

Today on TheStreet's homepage there will be a tidy video of me and Debra Borchardt standing by a body of water (yes, for real). Topic is ironically homebuilders, especially why I am positive to Toll Brothers (TOL). I went live with a buy rating on the stock on Monday. Here are the finer details of the recommendation in easy to understand, tape to the fridge bullet points:

  • I was interested in Toll Brothers' exposure to adult living communities with baby boomers poised to retire. (Kimberly-Clark (KMB) noted in its recent earnings call that sales of Depends for men were strong, and a strategic area of focus -- which makes you think about baby boomer investments). This is a major opportunity for the homebuilder sector. In chatting with the execs at Toll Brothers, I was left confident in them being involved in the market; for instance, the company offers a luxury community experience in the Sunbelt states (think turnkey properties with a very manageable square footage). There seemed to be a wish to continue to place attention on this market opportunity.
  • The private builder market has been decimated, this much I knew. But to hear the team mention that Philadelphia once had eight to 10 private companies and now has none, despite the thawing in the lending market, was somewhat shocking. It confirmed my suspicion that the publicly-traded builders have a near post-bust monopoly (so I am reluctant to say we will see any M&A activity anytime soon).
  • Land prices have begun to trend higher, theoretically a good development for the value of Toll Brothers' portfolio (hence, the stock may be relatively undervalued on a price/earning basis).

JC Penney...WOW

The market is dead accurate in sending JC Penney (JCP) shares sharply lower in response to the Mike Ullman hiring. Not only is he poised to get in the way of any upside sales results from new in shops (and positive bottom line surprises that hit returns on these things), but his performance in the lead up to his booting in November 2011 was horrible. In fact, in the last three years at the helm, Ullman was out-executed by Terry Lundgren, the chief executive officer of Macy's (M), going by the numbers (Ullman and Lundgren were appointed as CEOs of their respective companies in the same year, 2004).

Read this and read it carefully: do not go anywhere near JC Penney. If you want to be a champ and get involved in department stores, ponder whether to pay up to own Macy's, which is twisting the knife in JC Penney's back.

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