In reviewing our first Retail Stock Portfolio Challenge results, one might conclude that predicting losers is a lot easier than winners in the world of retail. And yet, short-selling isn't as easy as it might appear. Had David Livingston tried that tactic with Nordstrom - down over 30 percent for the quarter - his victory would have been even more dramatic. Even so, congrats are in order for Mr. Livingston who deftly counted on Sears and Winn-Dixie to be profitable disappointments and, with nearly a five-point total yield, looked impressive enough next to a 14-plus percent drop in S&P's Retail Index during the quarter.
For Mark Lilien, a portfolio anchored by a couple of stalwart neighbors to the north and south - Sears Canada and Wal-Mart de Mexico - looked initially like a solid, conservative strategy, but those two retailers took a sharp nosedive in the final weeks. (Good buys now, perhaps.)
George Whalin...what can we say? You had the distinction of choosing the best performing company for the quarter - J. Crew; up over 16 percent - and the worst two - Nordstrom and Kohl's. Clearly, timing is everything. Standard and Poors is currently giving Nordstrom a positive 4 STAR (out of 5) buy rating.
Click to see detailed portfolio results...
But let's hear what our contestants had to say. Did they learn anything from the experience?
David
Livingston, Principal, DJL Research
Usually the only way to win a competition like this is to take a risky strategy. Simply picking good companies and hoping they report good news will generally only produce modest results at best.
I was hoping to score big on Sears Holding and Winn-Dixie by shorting their stocks. Jim Cramer recommended Sears only because he used to drink beer with Eddie Lampert and thought somehow, magically, the chairman would pull something off. But one thing all of us in retail knew was that, as far as sales go, Kmart and Sears are duds and only bad news would be coming out in the near future.
I figured the hype on Winn-Dixie would wear off soon and the false façade of a rebound would come to light. And it has. Kroger is doing great and reporting good numbers. Unfortunately for me, it did not reflect in the stock price. Going long on Kroger is probably a good long-term strategy but way too conservative for a short-term contest - my mistake. A&P is near even as I write this. I shorted A&P hoping they would really mess up the Pathmark deal. They didn't, but luckily they didn't go up too much either. If I had it to do over again, I still would have shorted them.
Mark
Lilien, Consultant, Retail Technology Group
2007 Q4 was awful for retailing stocks. The S&P 500 declined four percent, but the Consumer Discretionary sector (which includes retailers) declined 10.5 percent. The only sector that performed worse: Financials, down 15 percent, due to the subprime crisis.
All three contestants beat the S&P Consumer Discretionary Index, but the only profitable strategy was David Livingston's shorts. Only two of nine U.S. stocks rose, and none of the foreign stocks. Biggest decliners amongst our picks: Nordstrom, Kohl's, Sears (U.S.), and eBay. The only two gainers: A&P and J. Crew. Was there a theme?
George
Whalin, President & CEO, Retail Management Consultants
First, I would like to report that I won't be giving up my consulting business and becoming a stock picker any time in the near future.
While nine of the 12 stocks that were picked by the three of us decreased in value during the period, it will be interesting to see what happens when these companies report their results for December. The lesson here could very well be that stock values don't necessarily reflect the short-term sales results that retailers produce.
Holiday 2007 may go down as one of the most unusual we've seen in many years. Consumer volatility and media that embraced the idea retailers were desperate all seemed to fuel what at first appeared to be a very down year.
When sales in stores for the last week of December and first weeks of
January are coupled with online sales and the entire shopping season we may find it wasn't so bad after all.
Discussion Questions: Do you see any correlation between the performance of the stocks in the contestants' portfolios and the results of the Holiday '07 season? Looking forward to 1Q08, do you see any interesting indicators for the stocks in the portfolios?