The Day Ahead: Staying Cool and Collected

 | May 03, 2012 | 8:30 AM EDT
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To those who emailed me Wednesday to praise my "Baby Bull" term, thank you. Today, let's try this one on for size: "maximum mental overload," or "MMO," to those so inclined. MMO is defined as the ingestion of such a significant volume of financial information, spanning across topics, that one begins to see mirages from a set of black numbers printed on a white background.

I strive to avoid MMO, as it leads to bad analytical and investment decision-making, and the exploitation of opportunities by others who remain cool, calm, and collected. Unfortunately -- and I am rather confident this is a feeling you have as well -- sidestepping MMO is usually easier said than done. Let's try and cure our symptoms together this morning.

Symptoms of MMO

Irritable: You've initiated a new position because market sentiment seemed favorable, but it's now down a few points due to data that contradicts that from the prior day.

Sleepy: You continue to read endlessly and study chart patterns in order to validate the exposures in your portfolio. However, the more you read, the more confusion sets in -- sort of like being tipsy and tossed into a room with mirrors and evil clowns.

Angry: You grow upset amid comments posted by macro strategists and traders in the buzzy story of the moment -- because they merely fit the mood of that particular moment, even if that mood is very different from that of the day before. You wonder to yourself how people from the same firm could be so far apart. Subsequently, you go to bed angry without concise picture on how to attack the market the following day -- and rise in a foul mood as well.

MMO in Full Bloom: May 2

Earnings season: There's been a dip in savings accounts, people are chilling in homes they are no longer paying for and personal consumption expenditures were strong in the first-quarter gross domestic product report. There was also upside to earnings guidance by retailers: MasterCard (MA) and Visa (V) reported strong payment volumes, and Whole Foods (WFM) confirmed the trend with its 9.5% same-store sales result, accelerating same-store sales trend and a lift in fiscal year earnings guidance.

Meanwhile, American Eagle Outfitters (AEO) meaningfully hiked its earnings guidance for the first quarter, and competitor Zumiez (ZUMZ) reported $6 million more in sales than what it had projected three months earlier.

Curing MMO: Your initial inclination may be to believe the macro strategists and chalk these positives up to weather. This is where MMO incubates. But here's how to cure it, and ultimately subscribe to the notion that it's OK once again to pick stocks. (Note that I personally like how stocks are acting in response to earnings of late.)

Keep in mind that pricing power is being realized in cutthroat global markets, cost structures remain lean and consumers have told us they have the capacity to buy near full price if they are so inclined. Should growth in the second quarter and beyond slow down from the self-fulfilling nature of the fiscal cliff and less easing from the Federal Reserve, quality companies are still likely to command relative valuation premiums. It's our job to find these opportunities.

One name that I have grown into is Molson Coors (TAP), a quality company that trades on a discount to its peers. Molson is shaving off costs, has expense and revenue synergies in the pipeline from a recent acquisition and offers a 3.1% dividend yield. In a bad economy, people drink more beer. In a good economy, the company sells more and has a bottom line that benefits both from that and from productivity initiatives.

Macro: As soon as the ADP employment report crossed, I wrote a large "who cares?" on my notepad -- a first-blush type of reaction. First, expectations for Friday's Labor Department numbers have been jawboned down from the second week of April as a result of the trend in initial claims. ADP basically reinforced that, with the Institute for Supply Management manufacturing jobs component temporarily slipping a factor of enthusiasm into the markets before Friday's Super Bowl.

Second, referring to my earlier point on cost structures, I am just not seeing or hearing bullishness on companies' need to hire new workers to coincide with the year-to-date payrolls figures. Ditto the circumstances around the eurozone -- companies are telling us that volumes are "increasingly" worse compared with the already-soft fourth quarter. So is there reason to be shocked when all signs suggest caution? That, in turn, proceeds to trumps a component in the ISM.

Curing MMO: To cure this added MMO cause, drink the elixir I spelled out for earnings. The companies you opt to own should be relative outperformers on sales and profit margins in troubled European Union end markets, and they should be share-gainers in a U.S. economy that isn't seeing everyone winning. This is why I gave thumbs up to VF Corp. (VFC) Tuesday, G&K Services (GKSR) earlier this week and Cheesecake Factory (CAKE) in mid-April. Relative outperformance, plus knowledge of each business and attractive valuation, equals winning.

Thursday Notepad

● Staying on message, if a retailer does not boost its first-quarter earnings guidance today, stick it in the doghouse -- or on a list of possible shorts. These would be winning retailers bathed in the glow of a warm winter, pulling in extra sales and profiting above plan due to fewer discounts. I have a teen apparel retailer Buckle (BKE) on the short list for being escorted to the doghouse: Competitors got product right for spring and, I believe, have stole market share.

● Most interesting aspect to the Whole Foods earnings report: The 21.1% same-store sales increase at stores opened no longer than two years.


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