Subscribers to my Revolution Investing Portfolio have heard me say this a dozen times but the stock market doesn’t work on your schedule. Check out this chart from Alpha Trends via my friend Barry Ritholtz.
With the country falling apart and things as bleak as they’ve ever been, stocks rallied more than 15% eight times and even doubled twice. And look at the first couple lines of this Time article from 1973 if you need more convincing that stocks can go against the sagest of opinions:
The first definitive year-end report card on the economy—the stock market average on the final day of trading —was cause for solid optimism on the part of investors. Last week the Dow Jones Industrial Average closed at 1020 —up 130 points for the year, a remarkable gain of 15%.
Most Wall Street analysts are convinced that the market will continue to climb smartly in 1973. Brokers looking for a marked increase in trading volume see signs that small investors are beginning to overcome fears instilled by the Wall Street slide of 1970 and return to the market.
Here’s how the Dow ended up doing in 1973:
Go out another year and the surefire rally became a 48% drop in the blink of an eye.
Don’t listen to analysts telling you to sell because some German politician has an ancient beef with a neighboring province. And don’t buy a stock because everyone else is getting rich on a certain trade. Use the macro picture to inform your rationale but not as a litmus test. The stock market and economic indicators don’t have to always be in sync. If you’re in America reading this you almost certainly know people out of a job. And the yet the Dow is almost at its all-time high. So here are examples of five stocks that have boomed in the past year despite negative sentiment.
1. D.R. Horton, Inc. (NYSE:DHI) +105%
D.R. Horton DHI +3.52% is a home-builder that got destroyed during the financial crisis. For years I hated on real estate as an investment, but I’ve been saying that prices have fallen so much it’s time to start buying. As the listed foreclosure supply is getting soaked up, TARP banks like Wells Fargo WFC -0.01% are itching to start loaning to homebuilders again. Let’s be clear, there is a shadow inventory of millions of homes stuck in foreclosure limbo because of legal settlements between the banks and the Feds and the robosigning mess thanks to the likes of Lender Processing Services LPS -0.40% . But the speculators and hedge funds can’t wait, they need fresh blood now. Donald Mullen, the Goldman Sachs GS +0.38% partner who steered the bank’s mortgage derivatives business, has launched a $1 billion fund to buy single family homes. Which is all bully for DHI, which has even started buying land in places like Phoenix again.
2. Pier 1 Imports, Inc. (NYSE:PIR) +100%
This is one I thought had died with that 90s trend of rattan and wicker in every room. This stock has a crazy history, having teetered on bankruptcy half-a-dozen times. Pier 1 PIR +2.06% crashed after September 11th just like everything else and then went on to triple in the next eight months. Maybe that nascent housing recovery is why Pier 1 PIR is up so much, but this company seems to be more of a speculative vehicle for traders than anything else. But I actually do like their ecommerce initiatives, management seems to get that consumers want to to shop online and have stuff shipped to the store, and have both those experiences work in concert. Comp sales are up 7.2% and margins look healthy. Not a revolutionary company and not one I’m looking to invest in, but impressive numbers in a tough environment.
3. Sherwin-Williams Company (NYSE:SHW) + 99.8%
Yeah that’s right, a paint company has outdone most all of tech. Sherwin-Williams SHW -0.93% is a hedge fund favorite at the moment, a levered bet on the housing recovery. Gross margins are at 45% and the physical stores have been seeing great foot traffic. Looking pricey at 28x earnings, kudos to those of you who picked it up much lower. I’d be looking to trim right here or spread my bet into a smaller competitor. SHW is now a $14 billion company, so if you believe the paint-industrial-complex is going to keep growing, sell a little and invest it in the $4.5 billion Valspar VAL, they have similar prospects and more room to run.
4. Eagle Materials, Inc. (NYSE:EXP) +131.3%
Another beneficiary of the housing boomlet, Eagle Materials EXP +0.35% makes sheet rock. Revenues are up 28.5% y-o-y as the company was able to pass on raw materials cost increases to contractors. Arch-rival USG Corporation USG +2.03% is up 164% on the year and I wouldn’t be surprised if the two merged within the year.
5. Foot Locker, Inc. (NYSE:FL) +92.8%
I’ve been hearing grumblings that Zappos’s management is a little unhappy they sold to Amazon AMZN +0.67% . While I think it was a smart move, it certainly seems the market would have loved a Zappos IPO since Foot Locker’s FL +0.35% stock has been booming. And somehow gross margins are at 31.3%, pretty impressive for a retailer. The company racked up 10 consecutive quarters of sales and earnings growth. What everyone who didn’t invest in FL missed was that demand for Nike NKE and Under Armor UA products have been absolutely booming and even though retail is moving online, people still want to try on Air Jordans before they buy. And that so called show rooming effect where people browse in the store and then buy the product online for less? I think it’s not as bad for Foot Locker because you have to interface with another human being to get the shoe from the back, then lace it up, then help you try it on. After all that non-social-media interaction that I’m guessing lots of people are way less likely to walk out the door and order on Amazon. Foot Locker has a couple of key analyst upgrades and looks like they can keep up the momentum. Plus all those impulse sock purchases really add up.
For more investing insights like this, I invite you to check out my new book, Everything You Need to Know About Investing, where I explain how the whole markets work in easy-to-understand language.
Cody Willard writes Revolution Investing for MarketWatch and posts the trades from his personal account at TradingWithCody.com. At time of publication, Cody was net long Amazon and net short LPS. Follow Cody on twitter at twitter.com/codywillard. Cody’s new book, Everything You Need to Know About Investing, is available in digital and in paperback.