Don't Buy Sectors; Focus on Business Models, Target Markets

NEW YORK (TheStreet) -- I suppose a place exists for sector investing. The mutual fund and ETF industries certainly need this to be the case.

Personally, I have never been a big fan of sector investing, whether through a fund or via baskets of individual stocks. While I do own a target date retirement mutual fund and a long position in the iShares MSCI Canada Index ETF (EWC), I prefer to pick stocks not because of the industry they operate in, but on the basis of who their customers are. A little bit of disruption makes me even more bullish.

For example, the most compelling story in the auto industry right now involves Tesla Motors (TSLA). If you buy into the myth of diversification, you could spread yourself across the entire automotive sector. This approach, however, takes focus off of the Tesla narrative.

You could drill down and make it a play on electric vehicles (EVs). If you do this, however, you end up with dogs such as Ecotality (ECTY) (down 82% over the last year). And, again, you miss the point. Tesla is not an automotive sector play. It's not an EV stock either.

A bullish move on TSLA works out not because auto sales increase across the board or because EVs take off; it follows through because of the company's next-to-air-tight business model. It has high-end, exclusive luxury items available in relatively small supply. It generates pent-up demand among a customer base that does not have to ask how much something costs. And Tesla locates its showrooms in places where that target market lives and plays (e.g., San Francisco, Santa Monica, Bellevue and Miami Beach).

Starbucks (SBUX) presents a similar situation. It's not a play on retail. It's not a play on coffee. That's absurd. That type of thinking would get you into relative underperformers such as Peet's Coffee (PEET) and Caribou Coffee Company (CBOU).

You buy Starbucks because it's a tech company in a restaurant's clothing. You buy it because it compels people to drop five bucks a day at the same time at the same location every single day as routine. You buy it because it's a gathering place. You buy it because it's about serve alcohol at select locations. You buy it because it innovates in the mobile arena and sells CDs and other forms of media via its WiFi and as impulse checkout buys.

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