Looking for Trends to Exploit

 | Sep 02, 2011 | 10:00 AM EDT
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It's Friday. Time to let the drinks flow and the karaoke kick into high gear. After a week where green on the screen has triumphed over that icky red color, why not pull out a bar stool and enjoy a dirty martini with extra olive juice. In trying to bring to life how my week unfolded, which was ridiculously insane, I plan to make today's column a buffet of investing goodness.

First on the docket is the August same-store sales from retailers. The August numbers brought back memories of 2006; solid gains for yet another month and devoid of earnings warnings. Back-to-school sales started on a whimper, but ended with the roar of a young lion. Okay, a touch melodramatic maybe, though the data yesterday suggested to me that somehow, someway, consumers will satisfy their needs in addition to some of their frivolous wants.

Spending won't mirror the exuberant consistency of 2006 to 2007, rather boom and bust periods when the consumer is all but forced -- or overly enticed -- to shop. The strength of the sales tallies immediately sent me into trying to find ways to exploit trends; if teen retailers made it through the back-to-school season mostly unscathed, and so did Macy's, who is losing?

In my humble opinion, moms, heads of households, are more willing to invest in her children and her man rather than herself, which she did in 2010. Inflation has caused moms to get crafty with budgets, and they are responding by taking the existing disposable income and satisfying the needs of the home. Nowhere is this more acute than in low-income households, and nowhere did this show up better than in the August sales miss for Cato Corp. (CATO). The company is competing on price for low-income household dollars. Short the stock.

It's tough out there for women:

  • ·         Only about 57% of women hold a job
  • ·         Women earn 16% less, on average, than men.
  • ·         In July, 68.9% of women aged 25 to 54 had jobs vs. 72.8% in January 2008. In 1969, fewer than 50% in this bracket had jobs.

Economic Data: Mixed Is Different Than Downright Dreadful

A trend seems to have developed in late August of macro data offering a mixed interpretation of the economy as opposed to bad. Not only did we see it in the August chain-store sales, but also in the ISM-manufacturing (August) and construction spending (July) report cards. I think it's a wise course of action to go back and review second-quarter earnings reports, a batch that went truly ignored by the market as the sky was falling around us.

The first place to review is global industrials. If the market is going to continue to buy into further quantitative asking from the Federal Reserve, the dollar should come under renewed pressure. The first name that popped up on a screen is Timken (TKR). Timken is a stock that was unduly thrown out with the bathwater from the late-July peak in the broader indices; the stock trades at a near 50% discount to its historical price-to-earnings (P/E) multiple post market rout.

This is simply a clear mispricing created more by fear than reality as its earnings before interest and tax (EBIT) results in the process and steel segments are increasing, significantly driven by emerging market penetration and pricing power. In addition, Timken's management came out swinging against the naysayers with respect to full-year guidance, raising it materially above consensus. Other favorable aspects are its recent 11% dividend hike with a 2.1% yield and a very low 19.1% debt-to-capital ratio.

In the words of Jim Cramer, this company is a "buy, buy, buy!".


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