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Sozzi: Do Your Homework Early

Stock quotes in this article: LOGI, FL, DG

Last year, back-to-school sales were worse than market expectations due to debt-ceiling concerns punching consumers in the head, 2012 should be better. Retailers have begun to bring in merchandise for "back to college" already, specifically promoting it on their websites. This year, instead of occurring at the last minute, sales may be a little bit more spread out and scared retailers may start by offering the lowest prices possible. However, investors should not let that fool them into thinking the season will be gangbusters. Consumer confidence is on a downtrend and, as the last employment report showed, hourly wage growth is weak. Moreover, I believe the May and June same-store sales reports from retailers showed consumers are saving their gas savings instead of hitting the malls hard as some economists had pontificated.

So, in a competitive environment laced with uncertainty, how do investors win? I am using the following three criteria to plan a winning portfolio, which includes three stocks and why I like them -- notice that none of them are not teen apparel retailers.

  • Technology: The company must have exposure to the Apple (AAPL) ecosystem with interesting products.
  • Fashion: The company must be doing anything but selling basic denim, which is always one step away from the markdown pile.
  • Low income: The company must be offering back-to-school items for low-income consumers - and be under Wall Street's radar (as this creates a surprise factor on back-to-school earnings).

Technology Pick: Logitech (LOGI)

  • This name fits one important criterion I am using to pick stocks this coming earnings season: The company must have beaten earnings by a large amount in the first quarter. Plus, the stock has had to outperform the S&P 500 from when it began to correct on April 2.
  • The company has announced a major restructuring plan that is about to benefit earnings. My sense is Wall Street's estimates are still too low.
  • The company has significantly reinvigorated the product portfolio, for example infusing fashion into their wireless mouse products geared toward teens (where bright colors and patterns are selling).
  • The company has exposure to the Apple ecosystem through new products introductions, for example a bolt on keyboard.
  • For a very competitive industry, I was pleasantly surprised by the company's profit margin expansion in the first quarter. I expect this to continue amid new product introductions and cost benefits from its restructuring plan. The stock is too cheap at current levels.

Fashion Pick: Foot Locker (LG)

  • Teens are expressing themselves through their sneaker choices (I call this the "Justin Bieber/Usher effect") -- bright colors, high tops, etc.
  • The company is producing stronger same-store sales than main competitor Finish Line (FINL).
  • The company's nitty-gritty financials are better than Finish Line's, including: inventories are actually down year over year causing scarcity in the marketplace (Finish Line's are up about 14%) and merchandise margins are rising (Finish Line's are not).

Low Income Pick: Dollar General (DG)

  • The company is giving the low-income consumer the ability to buy school supplies in bulk off its website (surprise factor). The stores will also be the go-to destination for low-income Americans for back-to-school items as opposed to a Staples SPLS - I have been unimpressed by its early back-to-school promotion.
  • Same-store sales have accelerated for five consecutive quarters, which is not the norm for a retailer, but what an investor should be looking for in an investment in the sector.
  • Profit margins are not declining whereas a Family Dollar's FDO are due to restructuring.
  • The company is growing, meaningfully, by opening 625 new stores in its fiscal year and remodeling 550 stores.
  • Dollar Tree (DLTR) just landed a downgrade -- primarily because Dollar General is being viewed as a share gainer in the company's markets.

At the time of publication, Sozzi had no positions in the stocks mentioned, but positions may change at any time.

Brian Sozzi is Chief Equities Analyst for NBG Productions. In this capacity, he is responsible for developing independent financial content and actionable stock recommendations (including ratings and price targets) for an institutional and retail investor base. In addition, Sozzi is the Editor in Chief of the "Decoding Wall St." investor education online platform.

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