Yesterday I wrote about Dick’s Sporting Goods earnings report as a “tell” for the retail sector.

I don’t have a position in DKS but I have about 50% of my portfolio tied up in retail stocks despite the economy showing signs of going utterly pear-shaped.

Investing isn’t about being smarter than everyone else. It’s about being smarter and/or faster than the masses. The idea is to find a particular set of specific measurable performance metrics or trends shortly before they become conventional wisdom then get long as you can stand and wait for the world to catch up to you.

Two important points on this strategy:

1. Timing is critical. Early is the same as Wrong. I want to be about a month ahead of the pack. Any longer than that and it’s time to rethink.
2. You have to understand the other side of your theme perfectly. When chess prodigy Bobby Fischer ran out of opponents he practiced against himself. You’d be amazed how hard that it is to compete against yourself in anything without cheating. Don’t invest until you can make a perfect case for how and why you could be wrong. Seek dissenting opinions.

 

My Thesis

I think this is the year Wall St rewards companies for spending on their core business rather than doing more buybacks. Specifically, I am investing in retailers that are a) growing their online business faster than the low teens rate of overall US ecommerce b) investing with the goal of seemlessly integrating on and offline… Customers don’t make the distinction between on an offline. It’s all just selling stuff. c) are willing to take an earnings hit in order to spend.

That last point is counter-intuitive. I want to be long stocks that are warnings-proof. Short interest at DKS is up >3x since last May. Most of them were betting earnings would miss. My bet (on retail in general) is earnings misses will be foregiven. If that happens the shorts are hosed. They have to cover because their catalyst (earnings miss) didn’t work.

We’ve seen Best Buy, Macy’s and JWN go up after bad reports (though in the case of JWN it took a while). So when DKS missed and fell 8% pre-market my question wasn’t why shares fell (they missed, duh) but if the stock could bounce, ala BBY:

 

It did. Here, in nearly indecipherable but surprisingly useful form are my notes on the the surprises during the conference call that triggered a 9% rally from when DKS reported to the close of trading. If the rest of the retail sector continues to trade this way you can expect to see a lot more people getting on the retail train.

Those are the folks I want to sell to at higher prices.

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Dick’s Sporting Goods reports this morning.

Estimates for Q1 stand at 54-cents on $2.28b. Full year is $2.89 on $7.31b. The co already warned for Q4.

Here’s my real-life pre-release cheat sheet*:

At this point you may be sick of retail coverage. You may prefer sexier stocks doing business in the cloud or selling $10 hamburgers. Or maybe you’re looking to scrape some goop off the bottom of the wreckage field that is energy.

Maybe you want to debate Apple some more or chase Tesla. Can Disney regain its downtrend?

I get it. Those are sexy stocks in the headlines. I was asked me about Palo Alto Networks as I was getting prepped for a routine colonoscopy last week. (The answer: “Too much risk just to get back to even. Go for ANF if you want the same danger seeking rush with more upside. Can I get the Michael Jackson drug now?”)

If you want cocktail party chatter stocks go play with Valeant. I hate cocktail parties in general and giving stock picks at said parties in particular. Professionally speaking I’m in it for winning, making money and scratching my creative itch, in no particular order.

Retail is where the money is in stocks right now. That alone makes the sector sexy as far as I’m concerned but I’m sort of a hussy that way.

 

5 minutes ago I dubbed this basket of stocks-I-own MALT just because I wanted to respond to something I heard my friend (name drop!) Becky say on the TV. It stands for Mr Awesome Likes These. Later I realized MALT is also the first initial of these stocks in order of performance year to date (Macy’s, ANF, LULU and Target).

I prefer Mr Awesome Likes These but the company initials might make a better mnemonic strategy.

 

Dick’s

Retailers are shaking off horrendous earnings and exploding to the upside when they hurdle the lowest of bars. URBN thinks it’s a pizza chain and shares are up 10% after they avoided blowing up by more than expected last night. These stocks move big and have been reacting well. In part that’s because merchants started reporting near the market lows February 11th.

Something else is going on here. The retailers were sticky before the market cratered. Dicks is up 25% in 3 months, a period during which they guided lower! The stock is way outperforming shares of the companies whose product it sells. Nike and UA have been slumping while Dick’s keeps chugging along.

BBY shares are up 8% since the miss. They never really even dropped. JWN sounded like lost children on their call and the stock has already recovered. With futures lower this AM and Dick’s set to report any minute I think DKS shares are your market tell of the day.

There are a lot of moving parts to this story. If you do conference calls, tune in to DKS through the webcast at 10am. Management is a hoot (the quarter they chucked golf under bus is legendary) and the company has its finger on the pulse of things you wouldn’t expect like fashion via Athleisure.

Some stocks are for buying (like the MALT group!). Dick’s is just one to watch.

Rememeber: it’s about guidance, stock reaction and brands.

Enjoy! And… Just because I’m not mature and it must be said… I don’t know why the company has kept the name.

• I know the notes look chaotic. That was also true of yesterday’s Shake-Shack cheat sheet, which ended up mostly being a bubble shaped hamburger when I realized how insane SHAK’s valuation is. Do your best to make sense of what I’ve written. I promise there’s value in there somewhere.

 

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