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At my firm, Thrasher Funds, I invest based on the impact of demographic and lifestyle shifts. Here are some examples of such shifts:
- Baby boomers are adopting a younger lifestyle, especially in terms of aesthetics.
The Gen-X generation is adopting an older lifestyle, especially in terms of spending habits.
Both age cohorts control more capital than their parents' generations at the same point in their lives.
The groups have "converged" in many of their spending patterns and lifestyle trends.
The groups are similar to each other, yet strikingly different from their parents' generation.
One of the best examples lately of demographic convergence has been one of aesthetics. Hoodies, jeans and T-shirts are no longer reserved for teens. Teens, young adults, adults and baby boomers have all taken cues from the same pages in fashion rags.
There have been several plays on this trend, including
( VLCM) and
Polo Ralph Lauren
, whose apparel is worn by soccer moms and rappers alike. (I own both stocks for my clients.)
- Abercrombie & Fitch (ANF) - Get Report is one of the only retailers that has successfully built a unique lifestyle brand, similar to Ralph Lauren. Its brand is just less mature and has a shorter range. One report calls it "Northeastern privileged preppy."
Whatever it is, it is has remained relevant for years now. When Abercrombie first hit the scene, I remember thinking its prices were too high. I'm not sure if the retailer has reduced prices or if others have hiked theirs, but Abercrombie seems much more reasonable now at $70 for a pair of its popular skinny jeans. This comes in a retail landscape where $200 for a pair of jeans is no longer shocking.
As for the stock, Abercrombie's valuation looks like a real bargain. The stock sells for just 18 times earnings and 14 times forward earnings. This is much cheaper than its retail peers, which include Polo Ralph Lauren at 22 times earnings,
American Eagle Outfitters( AEOS) at 22 and
Aeropostale (ARO) at 19.
Urban Outfitters (URBN) - Get Report is another company I like, though the stock leaves something to be desired. The company has fallen short of analyst expectations, and the stock has a P/E of 26. Some investors blame its problems on fashion misses, but it's really because of fashion hits. Their styles, which were once only available in their stores, are now available in both department stores and independent boutiques. Urban Outfitters isn't really a brand, but rather a "look," one that can be easily copied. So now the firm is trying to develop a brand via Anthropologie and Free People.
Another popular trend is the West Coast lifestyle/aesthetic of action and board sports. This trend continues to gain traction, and Abercrombie's Hollister offers a great growth story in this area. Investors can also look at Volcom or
Zumiez (ZUMZ) - Get Report if they like this theme.
If the retail theme is too specific for you, look at a broader play on the resilient U.S. consumer:
First Data (FDC) - Get Report. It's one of the largest providers of electronic commerce and payment services, and it processes about half of the
MasterCard (MA) - Get Report transactions in the U.S., according to The Nilson Report. Plastic is becoming ever present, and I believe that had a lot to do with why consumers didn't slow down when oil prices spiked.
- When I think of bad trades or investments, they often happen where I lack conviction. This year, that trade has been
Apple (AAPL) - Get Report. So far in 2006, the stock has been good (up 50% in the middle of this year), bad (choppy price movement) and ugly (the 50% drop that preceded the upturn). I have made and lost money on this stock, and I'm probably flat overall.
Nevertheless, I think Apple could be a winner in the short term, particularly this holiday season. It should get a boost from a surge in PC sales, iPod refurbishments and accessories, the first holiday season for Apple's flagship store on Fifth Avenue and great promotions such as the Bono red iPod that gives proceeds to Africa.
Fortunately, I've been able to avoid some of the truly ugly stocks this year. Technical signals have saved me from a number of bad stocks.
One bearish signal is a crowded trade. Some stocks that have popped up on my Demographic Convergence radar have been
Whole Foods Market
and Urban Outfitters. But these stocks had short interest ratios of 45%, 7%, 67% and 21%, respectively.
Whole Foods, which suffered from expectation fatigue, fell 23% after announcing earnings. Next in line was True Religion, which also fell 23% after announcing weak results. The fundamentals may have been strong, but the technical signals screamed "stop!" due to high short ratios and high expectations.
High betas are another red flag. While I was reviewing older files over the weekend, I came across a research report by the strategy team at a large investment bank. They had examined the role of beta risk and concluded that investors were not being sufficiently paid for taking on extra risk. I have also anecdotally observed this in my own portfolio and in the broader markets.
"Do you want to jump on board these already-crowded trades?" an analyst asked me. You can, but watch for the short squeeze if the crowd is wrong. Urban Outfitters, which already has a juicy P/E, recently reported disappointing sales figures and the stock rallied 4%. This seemed odd to me in a market that loves to take snippets of information and overreact.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider True Religion to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At time of publication, Perkins was long Polo Ralph Lauren, Volcom, Abercrombie & Fitch, First Data and Whole Foods.
James Perkins is the founding partner and portfolio manager of Thrasher Funds, a long/short equities hedge fund that focuses on demographic and lifestyle themes and opportunistic situations. Before his current position, he was an analyst for ZBI Equities, a private firm that manages money for a wealthy family, covering the Industrial, Transportation, Aerospace and Defense sectors. He also worked for the CEO and CFO of Alliance Capital (now Alliance Bernstein), where he conducted competitor, equity market, and mutual fund performance analyses, in addition to examining investor sentiment and investor communications.