The Daily Dose: Watch the Small Caps

 | Jun 24, 2014 | 10:00 AM EDT
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Want to accurately predict the direction of the stock market during a Yellen chairmanship? Simply watch like a hawk the relative performance of small-cap stocks to large-cap stocks. Small caps are favorites of profit-hungry trading programs, as the underlying companies benefit from the hope passing on the TV screen that liquidity injections will lead to all sorts of good economic tidings. Valuations be damned. Unless, that is, you are Pier One Imports -- a small cap that reminded investors that even in a liquidity-driven stock market, some form of rudimentary research needs to be conducted.

So if small caps start to underperform for any sort of duration, be mildly concerned. I would be tracking the RUT (Russell 2000 index) daily.

Russell 2000 (RUT) -- Source: Yahoo Finance

Source: Yahoo Finance

In other news, there are two developments that are giving me a giant headache because they are the true train wreck stories. The first is Chip Wilson, founder of Lululemon (LULU), causing a ruckus by reportedly looking to hire Goldman Sachs (GS) to advise for a bid on the company.  Considering the man holds over 20% of the outstanding shares and is obsessed with the brand he founded, this news shouldn't be taken lightly if you are short Lululemon based on fundamentals (or rate the stock a sell, as I do).

However, I want to remind every single headline chaser out there of one thing: Lululemon is in a state of fundamental peril that has jack squat to do with Chip Wilson's latest antics. 

These are the issues that I see that continue to leave me cautious on the stock:

  1. No wholesale doors at premium department stores, and no plans to do so.
  2. Way behind the curve on big data to aid in sales and margin improvement.
  3. Absurd levels of new competition that is drowning out Lululemon's newer product initiatives.

Buyer beware, including you Chip Wilson.

The other dumb story that is being heaped on my plate is American Apparel's bloody battle with its founder and borderline crazy person Dov Charney. Similar to Lululemon, I believe American Apparel (APP) is in serious fundamental peril. Unlike Lululemon, however, I don't think American Apparel is a viable business no matter who is brought in to finish plunging the company into the ground.

Here are the issues I see:

  • There has been zero evolution of the store interior; balance sheet prevents it from likely happening as a stand-alone entity.
  • H&M and Forever 21 are the destinations for fashion basics; American Apparel has outpriced itself from the market due to its manufacturing techniques.
  • American Apparel has not found its next big thing. For example, Ralph Lauren (RL) rocked polo shirts, but then successfully expanded into an array of categories as to keep competitors at bay. 

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volatility is quite low here, and we could see some downsides here in the short term. ...



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