Picking Apart Past Calls

This column was originally published on RealMoney on Dec. 14 at 2 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

As we head into year-end, it's human nature to reflect on our successes and evaluate our disappointments. Over the course of 2006, I've written about my share of winners on RealMoney and also in my Stocks Under $10 newsletter. In fairness, though, I'd like to address some of my calls that haven't lived up to my expectations. After all, the markets have a tendency to humble us from time to time. In the process of reviewing these, other investors might be able to learn from my mistakes.

Off Target

Back in June, I said that Target (TGT Quote) would head lower on the basis of higher energy prices (oil was above $70 a barrel at the time) and competitive threats from Wal-Mart (WMT Quote). Target is known for attracting high-paying consumers, and Wal-Mart is planning to restructure 1,800 stores to focus more on that demographic.

When energy prices fell more than 20% from their July peak, I knew my call on Target would miss the mark. In addition, Wal-Mart's plan to offer more high-end products turned out to be a bad idea, as evident in its slowing same-store sales.

Also, I believed the housing market would slow much more than economists suggested. Home furnishings accounted for 20% of Target's sales at the time, and a housing slowdown could affect this segment as well as overall consumer spending.

Unlike Wal-Mart, Target has no international presence, leaving it more leveraged to an economic slowdown in the U.S market.

My call on the housing slowdown was right, but my suggestion to avoid Target was clearly wrong. Shares are now 17% higher.

Looking back, I underestimated two things:

• Management's focus on increasing growth in other segments.
• The spending power of consumers.

I was right to assume that a slowing in the housing market would pressure earnings, but I was wrong to assume that management did not already know this. Target got more selective in aggressively pricing items in the home-decorating segment and looked to other segments to pick up the slack. Categories such as health and beauty, apparel, pharmacy and consumables surged, leading to steady increases in same-store sales in the ensuing months.

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