There's a reason I tell you to get into the weeds, dig into the conference calls, spend time listening to management and devour whatever insights companies can give you.
This kind of information allows you to make judgments that can help you predict tendencies and get you ready for opportunities -- often far better than the algorithms or the analysts can ever do.
Consider the conference calls the game film of our business. If you study the film, you can go from being a decent player to being a good one. I have often found that the difference between winning and losing is hard work -- and the hard work is watching the game film again and again until you understand the terrain and can adapt to it.
Take yesterday. There was plenty of really bad "action" in the market related to Mario Draghi's misfire, big bets gone wrong in currencies and, of course, the possibility of some new terrorist action developing in our own country. It was a discouraging day, for certain.
You could make decisions on the fly that might make you money for a day or two -- or you could hunker down and watch some film. I am stuck trying to produce what you see and read during the day, but I devour film when I am not on television, and here are some insights from a single day's game watching.
Let's learn from yesterday's winners: Kroger (KR) and Dollar General (DG). Both put up terrific quarters and their shareholders were rewarded for doing so. The strength of these two companies? They know their customers and what they want: good value at good price. If you stray from that mission, as Kroger said in its call periodically happens with some of the larger consumer packaged goods companies that supply Kroger, you lose sales -- and they go to Kroger's own branded products. If you don't offer value at Dollar General, they just go somewhere else.
That might sound like a bromide, but it isn't. For example, Dollar General knows that its consumer is always strapped for cash, or she wouldn't be shopping there to begin with. Now, with employment so strong you might ask yourself, what does she have to be strapped over? The answer is two-fold: rent and healthcare costs. The Dollar General customer is not seeing wage growth. But the inflation in rent and relentlessly higher healthcare costs are keeping her from going beyond Dollar General's walls.
I think that's incredibly helpful in understanding why, despite all the big macro reports you hear, things aren't so hot out there, and why both Dollar General and Dollar Tree (DLTR) are still doing better than you thought they would. A lot of investors cycled out of these stocks -- as well as TJ Maxx owner TJX (TJX) and Ross Stores (ROST), two other bargain outfits -- betting that the consumer was healthier. Often, she is not.
I say, often, though, because on the other side of the street is Kroger, the best run grocery store chain in the country. Kroger wants to dominate. It isn't trying to win over the high end, like Whole Foods Markets (WFM), and it doesn't accept its low-end lot, like Dollar General. It has to please everyone.
There's a lot of film that you have to go through just to get to the real heart of the matter, but some companies are confident enough not just to do the big numbers, like Kroger's astounding 5.4% comparable store sales, but give you the game plan themselves and tell you how they are winning.
Here's the best quote of the day that can help you in a whole set of defenses that the market throws at you. It's from Rodney McMullen, chairman and CEO of Kroger -- the best grocery merchant in the country: "The economy continues to slowly improve and customers continue to feel more optimistic, but the bifurcation in the economy remains. Some customers are willing to spend more while others are worried about their job or next paycheck or [are] more focused on saving. We find that all customers want quality products and a great shopping experience. For the customer who is more focused on natural and organic products we have our own Simple Truth products and a great shopping experience. We also have many entry-level price-point items of excellent quality. For customers looking for incredibly high quality products, like Boar's Head or Murray's Cheese, just to name a couple, we have that, too. Our job is to understand and deliver food for our diverse set of customers so they can save where they want to save and splurge where they want to spurge."
I would contend that most of Kroger's competitors do not understand these concepts. That's how, when they bought Harris Teeter for $2.4 billion in cash in 2014, or they purchased Roundy's for $800 million last month -- two okay grocers -- they can "Krogerize" them and immediately add to numbers.
The bifurcation is also why so many economists get stumped when they look at the aggregate numbers. It seems that everyone's the same, but that's because there is no average. There are the savers and the splurgers -- and Kroger gets both.
Now what about the fact that all consumers should be getting the benefit of lower gasoline prices? Why isn't that reflected in a general increase in wealth, and therefore spending? Dollar General tells you what's going on, there. The consumer's either saving that money or using it to fix deferred maintenance on their homes, and appliances and cars, from the great recession. There's some game film that says after all of these downturns, you should retreat to those retailers that cater to this clientele -- namely Lowe's (LOW) and Home Depot (HD) for deferred home maintenance and Autozone (AZO) for deferred car maintenance. The film shows you what to do.
And what's the consumer's real predilection? Kroger's film tells you that by highlighting its natural and organic offerings. Listen to this gem. "Simple Truth continues to grow at an astonishing rate, setting a record high for total sales in the third quarter while continuing to establish all-time weekly sales records throughout the quarter. " What's that bit of film say? Two things. One is that if Simple Truth is growing that fast it is taking sales from others. Hence the weakness at Whole Foods. Second, Simple Truth is private label and that means that chief private label maker Treehouse Foods (THS) will continue to do well.
Final insight? Black Friday has diminished in importance. As Todd Vasos, CEO of Dollar General said, "Our core consumer, because she is always very cash strapped, she does shop closer to the event. Now, she's always been that way. But we've seen it get a little bit closer to the holiday each and every year for the last few years."
There's a piece of the puzzle that can make the panic ease a bit for so many investors in retail stocks. Don't be glum yet. These final 20 shopping days may be bigger than you think.
I don't know about you, but I wouldn't have those insights without looking at the game film of the conference calls. It's a boring, nerdy game to play. But it's the edge you need. Oh, and don't forget that on one of the absolute worst days of the year, the stocks of both Dollar General and Kroger made you money. That's because they are best of breed -- and I hope now you have some insight as to why that could be the case.
