The Daily Dose: Watch the Small Caps

 | Jun 24, 2014 | 10:00 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

app

,

lulu

,

rl

,

gs

,

gs

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. 

Columnist Conversations

HP
Multiple downside targets have been met in HP....either trail stops down or book some profits or BOTH. ...
What an ugly short session for oil and energy related stocks. Think we get some sort of bounce on Monday when...
I saw a comment on JC's piece asking about a tariff on crude oil to protect the American industry and a respon...
Lang:
i was double-delighted to see Stephanie Link bullish on LULU but also a recent piece by Ed Ponsi reflecting th...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.