From: Jim Cramer
Sent: Friday, November 16, 2012 11:27 AM
To: Nicole Urken
Subject: DECK
This Jefferies recommendation of DECK as a takeover makes sense—get me a file! Next Timberland?
Nicole Urken, Mad Money Research Director
From: Nicole Urken
Sent: Friday, November 16, 2012 11:28 AM
To: Jim Cramer
Subject: RE: DECK
Agreed ! I was just discussing that VF Corp should buy Deckers and manage Uggs better – get at good price. Will send you the Jeffries M&A piece. Of course, DECK floundering now but maybe VFC could do something for that. (They are no Timberland certainly which was in moment of strength when VFC bought them).
Nicole's Research:
If you can manage to catch a breath of fresh air to think about holiday shopping amidst the fiscal cliff debates, you might be thinking about making sure your purchases align with the latest trends.
From an investing standpoint, when it comes to specialty retail in particular, merchandising so that the inventory is "fashion right" is key for the underlying companies to clock in solid results.
Improved merchandising is, after all, behind the turns we have seen of late Gap (GPS) and Urban (URBN)—and largely behind the positive theses for early growth names Michael Kors (KORS) and Tumi (TUMI), as emphasized by Goldman Sachs in their specialty retail note this week. Just on Mad Money on Tuesday, Saks (SKS) CEO Steve Sadove noted that customers want products that are new and different.
With holiday spirit in the air, the idea of thinking about buying the 'right trends' at the 'right time' is key for stocks—particularly for momentum names that carry high multiples.
On Mad Money, we used to look at a cohort of high-growth, high-octane stocks called the CANDIES—Chipotle (CMG), Apple (AAPL), Netflix (NFLX), Deckers (DECK), Intuitive Surgical (ISRG), Express Scripts (ESRX) and Salesforce.com (CRM)—along with later additions of F-Five (FFIV) and Amazon (AMZN).
The concept behind grouping these stocks centered on the idea that their performance could transcend macroeconomic pressures or temporary demands… in other words, we said they are not fads.
But of course, while all of these names had their periods of strong runs, only a couple retain their 'untouchables' status. The most high profile debacles:
(1) Netflix had been crowned a darling that could do no wrong, rising from the $30s at the height of the recession to near $300 per share. Of course, however, we saw the quick demise of Netflix strength in the summer of 2011 after Reed Hastings launched the company's elevated pricing scheme for the legacy DVD business to support the high- cost (and more competitive!) streaming business and international growth. This stock has made for some interesting trades here, but it can't seem to get out of the hotseat, from Facebook post scandals and content cost and churn concerns, even as it signs new partners like Disney.
(2) Chipotle's rocket launch over the past couple of years has been predicated on double digit comps and unit growth (over 10 percent annual growth)—not to mention the health quotient Food with Integrity initiatives, one of the more ethereal drivers of the stock (the "Danny Meyer quotient" we have discussed on Mad Money). The stock has thus fallen from its highs over $400 in April to below $300 currently. At this point, it remains a wait and see name as there is no catalyst to come in at these levels.
(3) Deckers, the company behind the ubiquitous Uggs, has had a rough run since the fourth quarter of 2011 when warm weather and high sheepskin costs pressured sales. The notion that the Uggs brand transcended weather and was more than just a temporary 'fad' (as opposed to Skechers or LA Gear) has caused the stock to drop from almost $120 to under $40. We recently highlighted on Mad Money that the brand is not dead and could be revived by a better manager—something that has recently allowed the stock to catch a bid. It is still well off its highs but certainly the jury is still out so wait for a pullback before starting a position.
(4) Express Scripts, the pharmacy benefit manager (PBM), was seen to have transcendent strength based on it being a big beneficiary of the generic drug wave and cost containment efforts for companies and beyond. However, its dispute with Walgreens (even though belatedly resolved) ultimately pounded results. Stay away from this one here – CVS Caremark (CVS) in the winner seat from both a front-end perspective and PBM perspective.
What is the takeaway of all of this?
Now more than ever, in order for a company to be successful (and for its stock price to appreciate as well!), it needs to adjust with changing sentiments, consumer habits, sector trends, and the macro picture… before it is too late.
We know this is true no matter what sector—be it tech, consumer, healthcare and beyond.
Ultimately, the failure of Dell (DELL) and Hewlett Packard (HPQ) to foresee the commoditization of the PC and not to shift into higher growth areas like big data, cloud, and storage have hurt the stocks, making both companies desperate for acquisitions and restructurings which have of late proven to be more disastrous than originally thought (Autonomy scandal!).
Goldman Sachs recently recommended Dell, but even at these levels, the stock looks like a value trap. If you are in it for a trade, don't over stay your welcome.
You could call it the Best Buy (BBY) predicament—ie being late to the party, sticking too long with brick & mortar in the case of Best Buy (point to Amazon!).
In contrast, more forward-thinking peer IBM (IBM) is better situated in the current environment, having diversified away from PCs.
Remember, it takes more than a hot trend to drive a hot stock. The mobile internet boom allowed Apple (AAPL) to soar from under $100 in March 2009 to a peak of $700—though falling of late.
But Research in Motion (RIMM) has suffered, down from its peak of over $140 in 2008 to $12 and change, though it has caught a nice double since the end of September. Oh, and remember Palm Pilot? Bad execution, bad products (ironically acquired by Hewlett—not helping them much!). In other words, execution and products are key.
Avoidance of commoditization: The avoidance of commoditization is the goal of all companies and to make a fad last as long as possible.
Nothing in life is permanent (how's that for some philosophy for you?) and now more than ever it is key for companies to shift with the times.
Ultimately, placing stocks into two groups:(1) game-changing stocks with years of growth ahead of them versus... (2) flash in the pan stocks is not the right way of thinking about investing.
Every company is at risk of being a flash in the pan, which is why on Mad Money, we always emphasize "buy and homework" versus "buy and hold."
Success is based on company being able to shift effectively enough to allow demand for its products to last as long as possible.
While Home Depot (HD) and Lowe's (LOW) remain the darlings of housing retail, Builders Square (Kmart subsidiary)—I'm not old enough to remember this one but Jim Cramer conveniently brings it up—didn't have an execution strategy and the firm was sold for a measley sum.
Branding: How about branding? When you're competing against giants, a company needs to find a niche where it's clearly superior.
That's how Red Bull managed to become such a success despite the dominance of Coke and Pepsi by marketing itself as an energy drink.
That's a stark contrast to Clearly Canadian the soft-drink maker that many thought could become the next Pepsi or Coca-Cola for a brief period in the early '90s—anybody remember that sweet tasting sparkling water? Instead Clearly Canadian went toe-to-toe with Coke and Pepsi on their home turf and got crushed. That was a fad.
Whether or not Washington decides to play Grinch this Christmas with the fiscal cliff debate, keep an eye on catching stocks at the right times.
Certainly, you can catch a trade in fallen darlings like Netflix, Chipotle, or Research in Motion (trade likely over!), but ultimately we need real catalysts before coming in, and at this point those name lack them.
Add Green Mountain (GMCR) to that list of stocks in no-mans land-- why not go with Starbucks (SBUX) which continues to boast strong growth.
What's the bottom line?
No stock is safe from becoming a fad.
Whether it the new social media cohort—Facebook (FB) or LinkedIn (LNKD), behemoths in search and e-commerce—Amazon (AMZN) and Google (GOOG), specialty retail names—Lululemon (LULU) and Under Armour (UA), healthcare—Express Scripts (ESRX) and Intuitive Surgical (ISRG), and beyond, constant shifting is paramount.
So as holiday season and 2013 approach, don't forget how key it is to beware of the 'fad phenomenon' risk… and don't overstay your welcome in trades.
Follow Nicole Urken on Twitter @nicoleurken
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