The Daily Dose: It's Time to Move On

 | Oct 15, 2013 | 9:30 AM EDT  | Comments
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It's time to move beyond the Washington melodrama and resultant real-life economic and psychological impacts. Yes, should Oct. 17 come and go without a debt-ceiling agreement, stocks could very well get massacred -- think a 400-plus point Dow drubbing. Forget about Oct. 17 being a "soft" default day, as the market will not like the message.

But eventually you the investor will have to return to focusing on individual companies. So what do you look for, knowing full well that there's currently no growth momentum in the U.S. economy and there are indications at a grassroots level that the Great European Union Stabilization is being uprooted? Although I touched on this subject Monday, a few fresh third-quarter earnings reports provide further clarity on what precisely to zero in on.

One to Dump: Costco

I was a bear on Costco (COST) shares toward the beginning of the year, but I was too early. Sometimes I have a tendency to overanalyze on a very miniscule level and then project forward, overlooking the heat of the moment. However, it's heartening that everything I saw back in June is now starting to appear!

First, the company generally refuses to take any form of price increases on high-volume items. Competition is a factor here, but management philosophy is also at work. In fact, Costco's fresh-food gross margin plummeted 80 basis points year over year in the most recent quarter due to ongoing investments in price. (One can only imagine how Wal-Mart's (WMT) margins fared during the third quarter.) This degradation was an acceleration from the pace I saw in previous quarters.

Second, it bothers me greatly when executives believe the corporate balance sheet belongs to them. Costco in particular has a whopping authorization to repurchase shares, but bought back no stock in the quarter and watched as dilution caused the share count to rise. That is unacceptable behavior to me, seeing as 14% of the balance sheet is in cash. I want a target company distributing cash not only via capital expenditures, but also to satisfy shareholders today. That's especially given cheaper stock prices relative to September highs.

Source: Belus Capital Advisors

Also Stay Away From: Stanley Furniture

Stanley Furniture (STLY) listed its 240-bps year-on-year gross margin drop as a highlight. That's a sign of an already-teetering business that is likely to languish in a slow to no growth backdrop.

Management also noted that it's "difficult" to predict incoming orders. I want to see stability in any comments and trends regarding the future, specifically in relation to third-quarter performance.

What to Embrace: Packaging Corp.

From a big-picture, macroeconomic perspective, it's a little concerning that Packaging Corp.'s (PKG) containerboard inventories were down 4,000 year over year by the end of last month. But, all in all, the details of the report were favorable -- and they demonstrated things you should be seeking in a potential winning investment.

Namely, the company achieved full pass-through of prior pricing actions with no material detriment to volumes. Also, sales were fueled by a combination of volume and pricing growth, and domestic revenue growth was far in excess of U.S. gross domestic product growth.

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