This is one of those times.
I want to start by revealing a methodology I developed a long time ago when I was a hedge fund manager trying to figure out how to come up with new investments that were off the beaten track but had tailwinds behind them that others might not know. We are in the heart of retail reporting season, a moment where many big retailers report and tell you what's selling and what's not.
My goal during this period was twofold: what trends stand out as investable so I can pick stocks within that trend, and what companies are doing so well vs. their stocks that I want to buy them.
So let's take a snapshot of the last 24 hours of reports and try to put a mosaic together that yields an idea or two -- or more -- that just might work out.
First, let's start with a disturbing report from Urban Outfitters (URBN). Here's a chain made up of Free People for teens; Anthropologie, offering eclectic housewares, clothing and accessories; and Urban Outfitters, a clothing and knickknack store that is the flagship of the chain.
Here's a company that has been experiencing a huge turnaround. At one time or another, one or two of the divisions always seemed to be failing to deliver. However, late last year the stars aligned and all divisions began to have terrific growth.
Until this quarter, when Anthropologie, with the most stores in the chain, simply hit a wall. It was a huge shock, both to Wall Street and to the company itself, which expressed extreme disappointment in the performance of the division.
Now, it is obvious from the action in this stock that investors have totally turned on the company, with the stock falling more than 15%. I have to tell you that any time a stock's down that much, you have to stop everything and figure out if there is an opportunity or not.
First, you have to ask yourself, is this something that's curable or is this a structural problem that might last for a while?
My temptation is to say it's temporary because management, on the call, said the problems at Anthropologie came in the last two weeks of the quarter and that things got appreciably better in May.
However, there are credibility issues here. How come the company didn't see the disaster -- and it was a disaster -- happening? Why didn't they signal that there were issues?
My judgment? Urban deserves the benefit of the doubt, but the pattern has been that you cannot pounce big on a stock the first day that it comes down. You have to wait, sometimes a day, especially when you have one that I thought would deliver a good quarter and I have been recommending.
So Urban, which has a huge buyback, will be in there buying stock, and at the same time I think the company will adjust and get things right, although it also flagged that it might have some distribution issues this quarter. Bottom line, it will be safe to buy Urban later this week when I figure the big sellers are done hitting the exits, but the company's lost a lot of faith on Wall Street, so it could be a long slog back to its highs.
Next, we have Wal-Mart (WMT), which, like Urban, reported a very weak quarter. Unlike Urban, though, there weren't high expectations here. That said, I believe people expected relatively new CEO Doug McMillon to give us something to hang our hat on. Nope. Nothing. I think this stock can bounce, but for the life of me I can't think of a reason to own it other than it has come down a lot. That's not enough in this environment.
Then there's Dick's (DKS), the athletic apparel and sporting goods store. The company's quarter was subpar, but the shortfall was almost entirely caused by the retailer's golfing business. That's all well and good, but unlike, say, Urban, I don't see any possibility of a bounce-back here as long as Dick's remains committed to golf, which is in some sort of long-term decline. If I want sporting goods, I would rather buy Nike (NKE) or Under Armour (UA).
Then there's TJX (TJX). Here's a company with a terrific mix of apparel and housewares from its very successful HomeGoods chain. I liked everything I heard here, but so did everyone else, which is why the stock rallied so immensely. That makes it tough for me because I want to buy things at a discount that did well, not at a premium, because the upside may have been stolen by today's action.
I still want to file away that its HomeGoods division did well because that might help me develop a larger theme that can make me more money than any individual stock.
Now this is intriguing. How did it happen? First, the stock was priced for perfection. It gave you perfection, but when things are priced for perfection, that's not good enough.
So now let's step back and look for larger themes. We know from the company that tools (especially power tools), indoor and outdoor garden equipment, décor, lighting, plumbing and appliances all did well as Home Depot breaks things down pretty minutely in what is always an amazing conference call.
You then look at all the stocks that could be relevant. I checked Masco (MAS) for kitchen and bath and -- no shock -- a 50-week high. No bargain. I look at Whirlpool (WHR) and it is well off its highs, but the company just had a terrible quarter. I then hit up Stanley Black & Decker (SWK) and there's an a-ha moment. The stock's only off a buck from its 52-week high, but it dominates tools. Plus it has major European exposure, which is a negative going to a positive.
We know not just from Home Depot but from TJX that people are spending on their homes. So we aren't just making a decision based on one store. And the company did report a remarkable quarter not that long ago.
Can it be supported by a larger world view? Let's see, we got housing starts this morning that were at a seven-year high. We also know from the Home Depot conference call that household formation is beginning to grow again, up to perhaps as many as 1 million new households, which is a big deal because we have been stuck at about 850,000 households for a long time.
Carol Tome, the brilliant Home Depot CFO, points out that "if you look at people between the ages 18 and 34, nearly a third of them are at home with their parents. And if they were all to leave their home nest like my nephew just did, thank goodness, that's 4 million households that would be created. So I'm just really excited about what the future may be for our business." If she is excited, I am excited.
Now we add them all up. Apparel seems too hard, although we are willing to play Urban for a bounce. Other categories haven't jumped off the page, except hardware, where we have a pure play.
Editor's Note: This article was originally published at 6:40 p.m. EDT on Real Money on May 19.