With the continued horrible economic conditions that have become a norm to a vast majority of Americans, the populous has had to adjust their spending habits substantially. Americans now think differently when they walk into a store, compared to the thought process that once encompassed them, prior to the great recession. A majority of Americans no longer spend frivolously. As a investor you must evaluate what the masses are doing, where they are spending their money, who will set to profit from the new spending habits. The American consumer who was once willing to spend money anywhere, now has the responsibility instilled in their spending habits to shop name brand items at a discount.
The plays in this current environment are Ross Stores and TJX Companies. This move will reward those in a jungle of an economic situation that collapses for the next few years or a climate where we run head first away from an American slow-down. You sit there stumped, wondering how will this play work in both economic conditions? The answer comes simple and straightforward, the American consumers have changed their spending habits and will not be changing them back anytime soon. These "cheap" habits are now instilled in Americas arsenal of shopping weapons. If Americans are no longer forced to shop at discount retailers they will choose to do so freely. If the masses are forced to shop "cheap" due to economic conditions, as they have for the last few years, these stores will continue to profit as well. Why spend 50 or more dollars on a polo when you can pay a measly $30 for the same item. The above example is how Americans are thinking as they go shopping on Saturday, the masses methodology that can be applied to many name brands and items, be it furniture, kitchen appliances, shoes and so on. Call it wealth effect, call it nervousness, call it whatever you like, Americans are scared of being poor again (think 2008, think unemployed, etc.) so they will continually pinch pennies.
Many Americans have seen the dark side, living pay check to pay check, many Americans have lost a substantial portion of their net worth in their houses, they feel poorer. You can attribute the change in behavior to whatever you like, the reality remains the same, Americans will continue to be cheap and the discount retailers will continue this profitable trend from this behavioral switch.
Retail remains a troubling sector, leaving many investors stumped when attempting to pick the best-in-breed company. The key to success in retail has always been to build a following that can not be shaken by economic conditions, by creating a cult like following of shoppers that refuse to take their money elsewhere. Cabelas undoubtedly has a set of hardcore followers, both online and in the retail store setting. By being the premiere outdoor outfitter they have found a unique niche and by continually providing for their specialized set of followers, they have seen enormous success.
What I love most about Cabela's is unquestionably their room for growth. Investors do not have access to many retailers that have as much room to grow as Cabela's. Compare them to a giant like Dick's Sporting Goods, though these two entities serve somewhat of a different populous, the store totals differ substantially. For example Dick's Sporting Goods have almost 500 stores while Cabela's boasts almost 40. From my point of view this can be taken as a plus with huge potential for growth. Though Dick's serves a wider range of sporting enthusiast Cabela's has the distinctive retail offerings that Dick's just cannot compete with. Therefore, both these entities can exist in the same market, suggesting that Cabela's could grow their reach by hundreds of stores.
The way in which Cabela's played the recent economic turmoil was by the playbook. When times were tough they adjusted both margins and ad revenues accordingly, looking after their core consumer. As times improve, which they have as of late, they are adjusting margins accordingly and spending more on advertisements to bring in new customers. The financial arm of this retail giant was once a burden, but as we see the populous better manage their credit card debt, this element of the business will only set to strengthen.
With Cabela's quality offering of outdoor goods, demand for their products, and room to go, this may just be one of the better retail plays for the future.
On a day like today, it isn't rare for one to sit idly by observing the successes and failures of himself and the traders around them. The social media gods have chosen both a winner and a loser. The winner happens to be Yelp, for the time being, and the loser, much to my chagrin, is the gaming giant, Zynga. This game, stock picking, the game of choosing the winners and the losers, is far from the end. I will, as a proponent of Zynga, refrain from an admission of defeat and keep playing "the game." However, we can sit, as more informed investors today, and see where exactly the divergence between Zynga and Yelp emerged.
This tale of two new tech babies can actually be broken down into a war of two tech giants. Yelp has the backing of Apple while Zynga has the backing of Facebook. Apple announced some time ago that Yelp would be an integral part of their next and best iPhone (and iPad, baby iPad, iTV?). Facebook, for the longest time, has derived many of its revenues from the social gamer Zynga. If you can't see the ocean parting these two tech giants, let me inform you using the most basic terms. Yelp has sided with the one and only Apple, the tech giant of our generation. Apple has proven its merit to investors time and time again, even when it was thought to undermine your portfolio. Zynga has built their business around a company that has questionable profits and a questionable business model. In laymans terms: the investing public loves Apple and is yet to believe in Facebook.
Another disparity between these two up-and-coming tech companies happens to be extremely basic (while still playing a major role in the valuation of these names) is size. This may seem like a minute detail, but the size of these new tech darling say volumes about their trading. Simply put, Yelp trades with a takeout premium and Zynga does not. If you recall the small start up Instagram and their purchase price of around a billion, you now see the story emerge. Yelp trades at a range where a large corporation, say Apple, could come into tomorrow and buy them out for access to their valued reviews. If someone wished to buy Zynga, say Facebook, they would have a bit more of a challenge coughing up the $8 billion or so to pay for Zynga at premium cost.
The last and final point that the investing public seems to have fallen for Yelp once again is its use. Yelp serves a purpose, it's the new word of mouth. Yelp allows users to say how they feel and give recommendations in the occasional form of insults. Zynga, in my opinion, serves a purpose as well, though the investing public believes that they can be replaced tomorrow. Yelp has proven it can stand on its own and the recent news out with Apple shows that they are the best-in-breed when it comes to reviews.
It is arguable that good companies trade well and bad companies trade poorly, blah blah. You might say "Zynga is down because it encompasses everything wrong in tech and Yelp trades up because it encompasses all the good in the world;" though you would be premising your argument on flawed logic. Both companies are of quality and will ultimately get their cake (preferably vanilla with chocolate icing) and eat it too. As anyone knows, companies do not always trade where they should, where they will, or where you want them to. I still am a long-time believer in Zynga (though I wish my money had been in Yelp) being that Yelp currently seems to be playing all the right cards.
I ain't gonna lie, I bought Zynga way too early, but time heals all wounds.
A fine line exists between a succesful advertisement campaign and a bad advertisement campaign. More often than not companies waste large quantities of money on advertisements that net them no return. Many companies have looked to commercials or online campaigns with big names to revitalize their lagging business as seen below.
This above ad came out last year mid summer 2011. Take a look at where the stock is today compared to last summer at that time. Yeah. Kenny Powers got his check and K Swiss got a ghetto shoe to the face. The above campaign can be taken as a prime example of what not to do, how to waste money on a failing endeavor. The campaign did lead to a increase in online sales of shoes shortly thereafter, though a faltering business can not be saved in a few sales. "Kenny Powers" could also have just not been a big enough star to get the money spenders going. Either way, this campaign was uh... horrible.
Taking a different approach we can take a look at Dos Equis. We are going to take a look at this company because their ads are nothing short of amazing. Yes Dos Equis does not front a real celebrity, but due to pure marketing genius they have created their own celebrity to give them a bump. The most interesting man was able to increase sales off Dos Equis in the United States while other foreign beers dropped dramatically due to the economy. Now that's good business.
If you watch any television as of late you will have noticed that Burger King has been taking your screen by storm. These advertisements are cute? They have put to work some big stars to sell the healthy options at their stores. An obvious attempt to take on McDonald's perceived healthier menu. The burger King advertisement campaign may be the key to moving the momentum their way. It is nowhere near as creative as the Dos Equis commercial, by the same token Burger King also has a product that's actually worth selling, unlike K Swiss. With such good earnings last quarter and a possible celebrity bump coming soon Burger King may be the king you want to put your money with.
No matter if you are a bull or bear on Burger King, one thing remains true, a good celebrity advertisment can change the landscape for a company. Though Dos Equis created their own celebrity in a sense, many other companies have come leaps and bounds with celebrities. Look around you and heed the celebrities because more often than not that is where the consumers money is headed. If the advertisement campaign is done correctly and the product can actually be sold (unlike K Swiss), then the campaign will net profits.
Here is a good piece by The New Yorker on the guy who plays the most interesting man.
Taking a look first at GDP, we see the same weakness as was at first anticipated. The second quarter does not suggest much improvement either. Being one of the huge barometers for our economy we can only hope that other macro news outweighs the negativity surrounding the GDP.
The housing situation remains inconsistent overall. We have had two back to back gains in the pricing index, though this is a meager movement after an overall horrible few years. Early last year we had a head fake that had the market tricked into thinking things were substantially better. Hopefully if we continue this positive trend we may see a more stable housing market which will bode well for the financial markets and our 'Merica economy. Pending home sales also dropped dramatically and were in harsh negative territory, though at the same time new home sales were looking chipper. These pending home sales may be a blip on the radar but should be something to definitely keep an eye on.
When it comes to jobs, things are once again hazy. We seemed to be moving in good territory for quite some time, though it seems we may look to test that key 400k number once again. Some of the upward movement has been and can be attributed to seasonality. Though, at this stage of the recovery the market and myself expects a much better number and if we keep moving in the direction of 400k I will be squirming in my trading chair. Keep an eye out for the big number Friday it will answer many of my questions concerning our jobs situation.
Since we live in such a consumer based society, we cannot forget the importance of how our consumers are currently feeling. The consumer has had a change of heart. Initially these indexes could be seen as a support for potential spending in the coming months. The public sees the news out of Europe and questions their job situation and current spending habits. When looking at the consumers we do see a continued plus, the price of oil. With lower fuel cost we hope to see increased spending over the summer vacation months.
