The Daily Dose: Morphing Into Santa

 | Dec 13, 2013 | 10:00 AM EST  | Comments
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Season's greetings from me, Santa, to you, the investor. Santa has had quite the week, first predicting more pain for Lululemon Athletica (LULU) shareholders six months ago and then slapping Wal-Mart (WMT). In between, Santa grabbed a beer with his contrarian friend Scrooge and hashed out this depressing collaboration.

Although I'm tuckered out after delivering a bag of awesomeness, Santa still has some magic left. I will just assume you have all been nice in 2013 by protecting your precious stock gains driven by Santa's advice and avoiding the pikers on the Street. With that baseline assumption, here's an array of gifts for you, the eager and jolly investor. Ho, ho, ho!

Only Buy Lululemon Stock if You Want to Lose Money

Very key language: Only buy Lululemon shares post its profound earnings related drop if you want to lose money. For those not too keen on directly losing greenbacks, allow Santa to give this tutorial on investing by using a retailer that has a daily trading stock.

When any company beats on earnings and issues weak forward guidance, it's not always a sign of under-promising to over-deliver three months down the line. It could very well suggest a fundamental issue at the company otherwise unappreciated by the market is expanding and needs to be understood.

Outside of comparable store sales having peaked many quarters ago, Lululemon has not found a way to more efficiently and consistently develop its product to drive gross margin expansion relative to the comp slowdown. When it did try to develop its products a little cheaper, #SeeThroughGate reared its ugly head.

With increasing competitors attempting to replicate Lululemon's success in an industry with a low barrier to entry (a strong social media community does not qualify as having a wide moat) and eating into market share (see in the comp trend), it was especially critical to bring in a new CEO with a deep operations background. The goal will not only be to reignite comps through new categories and global expansion, but to find ways to re-engineer the product to bring down costs and set gross margins back into expansionary territory (and then prepare for another slowdown cycle well into the future).

Santa Says: Revisit the stock when the new CEO articulates the initial outlook for 2014, which should encompass an attack plan to address lingering manufacturing issues.

It's OK to Borrow the Work of Others

Nothing upsets Santa more than having the work of his team of elves stolen. Believe it when Santa says he sees all, hears all and knows all across all social media and behind the scenes. Due to Santa being in a foul mood this morning because the markets are being knocked and calls are coming in from those who didn't heed his earlier words of caution, Santa is choosing to borrow from work amassed via a marathon note-reading season yesterday. You, dear investor, should simply thank Santa by cutting and pasting the knowledge below and sharing it. Of course, leave a four-pack of Red Bull out on Christmas Eve.

Santa's Bag of Geeky Market Stats

Since 1960, the only other years the S&P 500 didn't suffer a dip greater than 5% was 1964, 1993, and 1995. In other words, Santa cautions that a period of correction (think 10%) has odds north of 50% of happening in 2014 given the market's consistent inability to digest rate creep that could morph into rate spike if the Fed fails to communicate absolutely perfectly its unwind intensions (it's hard to assume they will nail the communication and process).

Don't be mad at truth-telling Santa, however. Just look at emerging-market stocks sinking again on good U.S. macro news that has not been accompanied by hawkish language from Ben Bernanke or Janet Yellen. From the notepad of Santa's reindeers, the noticeable slowdown in order trends reported by Toll Brothers (TOL) and Hovnanian (HOV) this week serve as a wake-up call that humans are sensitive to higher rates, and that has implications on housing supply-chain related stocks and even offers a worrying tale for automakers.

Want to have a great holiday in 2014? Then Santa would like to see you invest in tech stocks as they offer the best of risk-reward ratios amongst major sectors. To get in on the tech upgrade cycle action, fueled in part by innovation and corporate necessity, you, the investor, are only being asked to pay an average of 15x forward earnings for a tech stock compared to 18x for an industrial stock (how did Joy Global (JOY) pan out for you?) and 16.2x for the S&P 500. Apple (AAPL) is Santa's special gift to you for 2014.

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