2012: The Year of the Stock Picker

From: Nicole Urken
Sent: Thursday, February 02, 2012 6:26 PM
To: James Cramer
Subject: Show-off stocks

Below is memo on Michael Kors

From: James Cramer
Sent: Friday, February 03, 2012 6:17 PM
To: Nicole Urken
Subject: RE: Show-off stocks

52-week high. Wait for pullback. Next week—the COH v. TIF-why one worked and the other didn’t.

From: Nicole Urken
Sent: Friday, February 03, 2012 6:20 PM
To: James Cramer
Subject: RE: Show-off stocks

Got it. Europe

Last week, we looked at “show off stocks”—luxury names that are reporting blow-out numbers, driven by the "big spending" habits by high-end consumers coming back. However, the conundrum of the divergent reports of a strong Coach and a weak Tiffany & Co. was perplexing given overall signs of resilience from the core customer base.

Ultimately, Tiffany’s relatively higher price point is being more affected by dampened Wall Street bonuses, compounded by its European exposure. Coach, on the other hand, has managed to offer a compelling price range for the aspirational customer (with over half of their items under $300) and has negligible exposure to the Europe. Not to mention that Coach has a huge opportunity in its men’s rollout, particularly in China where messenger bags along with belts and wallets are very popular. So while Coach and Tiffany are both luxury domestic oriented names with Japan exposure and growth in China, their performance year-to-date (Coach up about 20 percent and Tiffany down slightly) along with their prospects going forward have diverged.

The contrasting results between companies in the same sector is a theme we have seen throughout earnings season. We have highlighted the divergence in the oil service space, with the more internationally-levered names like Schlumberger posting better results versus the domestic pressure-pumping-driven Halliburton and Baker Hughes. At the end of the month, we hear from Weatherford , a name that is not as consistent as SLB but that should benefit from its international levers.

Another case? Cisco vs Juniper. At the end of January, Juniper reported earnings that were consistent with its downside preannouncement earlier in the month, with earnings falling 33 percent year-over-year and revenue down 6 percent. While new products, cheap valuation and strong cash flow make this name intriguing, trends have been uninspiring—affected by the weak service-provider market in particular. Then, this week, we get a solid quarter from Cisco. Nothing to write home about, but solid. While guidance was a bit light, revenue growth was up 11 percent year-over-year with margins continuing to stabilize and a dividend boost to boot. Cisco, with John Chambers at the helm, is working to re-take lost market share and working its way back from disappointing results last year.

What else? Pepsi vs Coca-Cola . As everyone was busy comparing and contrasting the soda pop conglomerate Super Bowl commercials, the two companies were getting geared up to report their fourth quarters. On Thursday, Pepsi lowered its 2012 estimates by $0.40 a share. While the company’s major restructuring efforts to improve its underlying businesses are a longer-term positive, the lackluster guidance and results reflect the market share issues the company is currently experiencing. Not to mention that CEO Indra Nooyi is victim of the Valentine’s Day factor, choosing not to break up her company’s beverages and snacks businesses, something some investors were hoping for. After all, breaking up is hard to do. In contrast, on Tuesday, Coca-Cola beat earnings and revenue estimates with 6 percent organic growth (5 percent volumes, 1 percent price/mix) with growth across all regions and operating margins up year-over-year. Loser vs winner.

Another divergence to look toward? Home Depot vs Lowe’s at the end of the month—We have continued to prefer Home Depot as the company continues to see the benefits from its restructuring program at the beginning of the crisis.

The bottom line: 2012 is the year of the stock picker. Look, there are certainly cases where we see multiple winners within the same sector—look no further than Starbucks , Yum! Brands and McDonalds —but, for the most part, we are seeing (1) top dog vs (2) dog house. So do your homework and don’t see the market as just a pastiche of sectors. This earnings season, the fundamentals of individual companies matter again.

Random musings: We have seen a slew of dividend boosts in the last week—quite a positive. Friday, Hubbell and FLIR Systems .  Thursday, Harley Davidson, Lorillard , UPS, Occidental Petroleum, Activision Blizzard, Lear, Apache, and Pepsi.  Wednesday, 3M, Dr. Pepper Snapple , Cisco, Church & Dwight, Diebold , Time Warner, and L-3. Tuesday? Freeport-McMoRan , Simon Properties, Western Union , Mastercard , and BP .   Monday, HCA and Randgold.

"Inside the Madness" appears twice a week at madmoney.cnbc.com

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