“I am turned into a sort of machine for observing facts and grinding out conclusions.”
– Charles Darwin
Recently, we had a vigorous debate with one of the smartest investors we know.
The essence of the debate was, in effect, what is the value of macro for a bottom up stock picker? It is obviously a good question and one we need to justify in order to earn our keep. Our view is simply this: an idea can be incredible, but if Mr. Macro Market is going against you, it doesn’t matter that you’ve counted the number of shopping bags in shoppers hands coming out of a mall (or whatever your edge may be), the stock will go against you. In our opinion, risk management requires macro.
The point is simply this: we don’t get paid to be bottom up stock pickers, top down macro dudes, to be on the buy side, or to be on the sell side. We get paid to be on the right side.
I’m sure many of our subscribers believe that we are only on the Macro side. Trust me, we do it all. In fact, we have one of the most seasoned research teams in the business. Today, I wanted to highlight some of their top stock ideas, which are as follows:
- Darden (DRI) – Our restaurant guru Howard Penney likes Darden because the company is well positioned in an improving sales environment. Specifically, he believes the potential higher returns on capital in the next couple of years will drive stock performance and that people are missing that more capital is going towards remodels, which will accelerate these returns;
- United Health Care (UNH) – Healthcare sector head Tom Tobin likes this name because he thinks the business model is positioned perfectly in this environment of improving employment (we highlight this employment point in the Chart of the Day below as well). Enrollment growth should pick up and the mix will shift to younger enrollees, who comprised more of the unemployed, which helps on costs;
- WMS Industries (WMS) – Todd Jordan believes the long term outlook for the slot guys is bordering on incredible. Replacements will trough this year, and new markets will contribute meaningfully in 2011 and beyond. The normalization of replacements alone will boost EPS growth for WMS by 50%;
- CIT Group (CIT) – Financials guru Josh Steiner, who has plenty of experience with live investing ammo in his career, likes CIT due to its severe discount to historical book value ranges. CIT is currently trading at less than its book value and when accounting for book value accretion over the next two years, is trading at a ~74% discount. Historically, CIT has traded at ~60 – 200% of tangible book, which suggests meaningful upside from current levels; an
- Foot Locker (FL) – This remains Brian McGough and his team’s top ideas. They believe FL new management, in combination with a sea change in this industry, will take EBIT margins from 3% to 7% over the next two years, which will lead to meaningful EPS growth. Furthermore, their research (with NKE and FINL among others) suggest that the overall environment for footwear is improving.
As much as Keith sometimes suggests otherwise, we didn’t invent hard work at our firm. We just happen to practice it.
Darwin’s quote above is an apt one. In order to “grind out” the right conclusions, we have to observe a lot of facts. Luckily, to generate differentiated investment performance, it doesn’t require a 5-year scientific voyage on the H.M.S. Beagle like Darwin, but it does, however, require getting up early, observing a lot of data, and a willingness to evolve.
Below in the Chart of the Day, we have highlighted the relationship between employment and housing. As the chart emphasizes, keeping an Eye on employment, will be key to determining the direction of the housing market over the coming quarters.
Keep your head up and stick on the ice,
Daryl G. Jones