Love Your Family, Not Your Stocks

To Love, or Not to Love

Don’t Give Into Emotion

A Chain Without Chain Stores

Imagine yourself in the following position: You buy a stock you’ve researched and feel excited about. The company has a new product or service, and as soon as you buy the stock, the price heads higher … and higher … and higher! There might be a shakeout or two that you’re able to sit through, but after a few months, you’re sitting on huge gains.

At this point, it’s only natural to feel affection toward the stock. After all, it’s done everything you’ve asked it to do, and all the news is good, pointing to even higher gains. It seems as if the romance is only just beginning.

But, of course, nothing is forever–sooner or later, your stock begins to run into trouble.  It stalls out for a while, or begins to underperform the market. Then a good earnings report is released … but the stock sells off anyway. Over time, there’s some back and forth, but eventually, shares begin to break down decisively.

The proper thing to do is to sell the stock, take the profits and move on. After all, every stock eventually tops out and heads south (for an average decline of 72%, by the way–that is a historical fact). But the investor’s affection gets in the way! Falling in love with a stock is one of the oldest downfalls of investors; it affects novices mostly, but even professionals aren’t immune to the occasional siren song.  

Nothing good comes from falling in love with a stock. Sure, it might keep you in through a stock’s advance, but I can’t tell you how many investors I’ve talked to during the past 10 years that have literally round-tripped a big winning stock–riding it up 100% or 150%, only to lose all of their gains after the top in the stock and the market.

My simple message here is to focus your love on important things like your family, your favorite sports team or ice cream. Don’t fall in love with any stock!

Now, because we are human, our emotions will still come into play with our investments in one form or the other. So success is not just about saying “don’t be emotional; don’t fall in love” but also figuring out where to target those emotions.

The answer is obvious but most fail to see it: You should fall in love with your portfolio performance. If you want to get joy from the market, do it by loving what counts … actually making money! That means monitoring your performance like a hawk, setting total performance goals (by month, quarter, year, whatever) and striving to meet them.

I know that, personally, riding a big winning stock is fun and even thrilling. However, what really gives me joy is recording my portfolio’s solid bottom-line performance every month. That’s what this is all about–big winners are nice, but if they’re offset by a bunch of small losses, where’s the benefit? The goal is to make money, not score a splashy hit that’s a Pyrrhic victory in the end. So keep in mind why you’re investing in the first place–to make money, hopefully big money, not to crow about a winner or two.

Retail remains one of the strongest sectors in the market, and about the only worry in the group is that there are so many names to consider; you have to make sure you don’t get overloaded on one sector because, eventually, there will be shakeouts in every group, and if you have lots of exposure, your portfolio could take an outsized hit.

Retail remains one of the strongest sectors in the market, and about the only worry in the group is that there are so many names to consider; you have to make sure you don’t get overloaded on one sector because, eventually, there will be shakeouts in every group, and if you have lots of exposure, your portfolio could take an outsized hit.

Still, if you stick with the best stories in the sector and try to get them at opportune entry points, I think there’s big money to be made.  One newer leader is Francesca’s Holdings (FRAN), an operator of 283 women’s boutiques around the U.S.  What makes the company different is that each boutique is purposely made to look unique; there’s no chain-store feel here.  Also, the firm ships inventory daily, which keeps each store’s products fresh … but also keeps them in limited supply, creating an urgency factor among shoppers.  But what really impresses us is the store’s economics; on average, Francesca’s new stores pay back all investment made in less than one year.  That means the company can open a slew of new stores without running out of cash. At the end of January, Francesca’s had 283 stores, but plans to open another 76 (a huge 27% jump in the store count) in 2012, and 75 per year after that, up to around 900, which management believes is easily doable.  Combined with strong same-store sales (up 14.7% in the most recent quarter), this expansion is producing huge sales (up 40% to 50% per quarter) and earnings (a 46% projected rise in 2012) growth.  

The stock broke out around 25 last month and then surged as high as 34 following a well received earnings report.  It’s extended to the upside here (the 50-day line is down around 26), but dips toward 30 or even a bit below look buyable to me, as long as you keep a stop in the 26 area.  I think the company has great potential, but the trick is buying the stock correctly.

All the best,

Michael Cintolo
Editor of Cabot Market Letter

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