Finding the Right Sector Will Increase Your Profits
Investing Safely is Critical
Michael Kors
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How to Find Timely Stocks
When I first entered the investment world as a rookie out of college, I was hired as a broker trainee. My job was to take buy and sell orders from a wealth management company located just outside of Boston. This wasn’t just any management company, though, because the company administered 1,500 individual accounts, which grew to 5,000 accounts before I moved to greener pastures four years later.
I learned the secret to the company’s success, though—follow the business sectors to find timely stocks. Picking stocks in the sectors that are on the move and that offer the most promising prospects worked very well for the company and its many clients.
One great help is a chart that illustrates the sector rotation during economic cycles. The chart is called, “Sector Rotation Across Economic Cycles” and it depicts the 10 sectors of the economy as pictured by the iShares division of BlackRock.
Finding the Right Sector Will Increase Your Profits
Sector rotation does not always occur exactly as illustrated, but knowing where the economy is in the economic cycle can help you allocate your investment portfolio more effectively. Currently, the U.S. economy is stuck in the early stages of expansion. According to the chart, Early Cyclical stocks will likely outperform other stocks. Included in the Early Cyclical stage are Consumer Discretionary and Materials stocks.
I recommend over-weighting Consumer Discretionary and Materials stocks now, because the leading stocks in these sectors will likely outperform other stocks during the current stage of the economic expansion in the U.S. If the economy continues to improve, stocks in the Industrials and Energy sectors will shine.
You might be wondering if I have blinders on because I disregard all of the economic pitfalls (and cliffs) that have been predicted ad nauseum during the past several months. From where I sit, I see employment slowly improving, home prices and sales increasing, and retail getting stronger. Until the picture changes, I will remain cautiously bullish.
As I mentioned above, Consumer Discretionary and Materials stocks should perform well during the next several months. Retail stocks are included in the Consumer Discretionary sector and seem attractive, especially discount retailers, dollar stores and specialty stores. One of my favorite specialty retailers is Michael Kors, because the company is expanding its product lines and is competing effectively with Coach.
Michael Kors (KORS: Current Price 95.03)
Founded by fashion designer Michael Kors in 1981, KORS has evolved from an American luxury sportswear wholesaler into a global accessories, footwear and apparel company with operations in 85 countries. Accessories, including handbags and small leather goods, account for 80% of total company sales.
Through its two main brands, Michael Kors and MICHAEL, Michael Kors targets a broad customer base while retaining a premium luxury image. The Michael Kors name reflects the ultimate in luxury, with handbags and small leather goods retailing from $500 to $6,000, footwear from $300 to $1,200, and women’s apparel from $400 to $4,000.
The company is successfully taking market share in a growing global accessories market by manufacturing fashionable products and by using a multi-tiered pricing strategy that appeal to a wide range of shoppers. With 82% of 2013 total revenue coming from the U.S., Michael Kors has extensive possibilities for international expansion. In addition, e-commerce offers huge untapped growth opportunities.
Sales surged 52% for the 12 months ended 12/31/13 while EPS soared 73% to 2.93. Results were driven by impressive same-store sales growth of 22%, the opening of 100 company-owned and 50 licensed retail stores, and the conversion of 500 wholesale customers into highly profitable store-within-a-store formats.
KORS is benefiting from strong consumer demand in the U.S. for fashion handbags, small leather goods and watches. KORS has an expanding product offering (including men’s leather accessories and a new fragrance and beauty collection), and increasing brand recognition in Europe and Japan. Sales and EPS will likely climb 20% during the 12 months ending 12/31/14.
KORS shares are not cheap at 31.6 times current EPS, but earnings are forecast to rise 30% per year during the next five years. The balance sheet is very strong with no debt and lots of cash available to fund growth initiatives. KORS does not pay a dividend. I expect KORS shares to advance to my Minimum Sell Price of 121.78 within one year.
As I mentioned above, I also like materials stocks in the current stage of the economic cycle. I have reviewed several materials stocks and have singled out one particularly attractive buy candidate. I don’t have space to write about my materials stock here, but if you would like to receive my full write-up, just respond to this email. I’ll send you my report free—with no strings attached!
Until next time, be kind and friendly to everyone you meet.
Sincerely,
J.Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor
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