How Homework Helps: Urban Outfitters

When I preach homework, I do so because the companies under the stocks are dynamic. Few situations are as clearly dynamic and as in need of homework as retail.

A year ago Urban Outfitters (URBN - commentary - Cramer's Take) was hot, hot, hot. Anthropologie and Free People, its extensions, were hot, too. You often had to line up to get into the stores.

Then the company started getting copy-catted and the merchandise ceased to dazzle. Next thing you know, the comparable stores figures, the measurement of same-stores versus last sales, turned down. Initially I thought it might be an aberration and I gave the company the benefit of the doubt.

But the comp negatives continued.

Now to me, the company is in trouble, with high inventories, the wrong merchandise and a paucity of customers. While it was cheap when things were going well at $28, it is now expensive at $18. This is a case where a stock did not get cheaper because the fundamentals fell apart.

If you did nothing but say "Urban is a great retailer" and paid no attention to the darned thing, you would be getting scalded.

You would have lost a lot of money. Just a reminder that business is dynamic and you must always focus on the homework even when you trust management, like the stores and think that the growth will always be there. Things change. Stay flexible, do the homework and remember Urban Outfitters when you get complacent. Complacency can be a portfolio killer.

Random musings: In case you missed the rally, you won't want to miss my video for StreetWatch about what to do next. Click here to catch it, free.

At the time of publication, Cramer had no positions in the stocks mentioned.

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