In an investment world filled with high-frequency trading, instantaneous stock quotes, and charting patterns, it's important not to lose sight of a key fact: Behind every stock there is a company, a company that must offer desirable products in order to survive and thrive.
And, for many firms, never are those products more in the spotlight than this time of year. The holiday gift-buying season has companies pushing their newest and most eye-catching toys and gizmos and gadgets, with consumers lining up to judge them by way of their wallets and purses. A hot new gift item can make or break a company's quarterly, or even annual, revenue and profit results.
Of course, a strong product line isn't the only thing that determines the success or failure of a company and its stock. A firm must also have an efficient and effective management team that can take advantage of in-demand products, a balance sheet that allows that management team flexibility and, last but not least, reasonably priced shares.
With that in mind, I thought it would be interesting to look at how some of the firms behind this year's hot gift items stack up against my Guru Strategies: investment methods that are each based on the approach of a different investing great. Last year I ran a similar type of analysis, and the three stocks I was positive on in the column The Intricacies of "Buy What You Know" are up an average of close to 40 per cent compared with 11 per cent for the S&P 500.
Here's a look at how this year's "hot gift" stocks measure up:
The Gift: UGG Australia Women's Classic Tall Boots
The Stock: Deckers Outdoor Corp.
UGG Australia's ultrawarm, sheepskin-lined boots have become wildly popular in North America over the past 15 years or so. This year, its women's classic tall boots are among the top five clothing bestsellers on Amazon.com.
Just as shoppers give strong reviews to UGG's footwear, my Peter Lynch-inspired strategy gives high marks to Deckers, which purchased UGG Australia back in 1995 and also owns five other footwear brands, including the popular Teva sandal line. My Lynch-based model likes Deckers' impressive long term earnings-per-share growth rate of 42.4 per cent.
The Lynch-based model also likes the shoemaker's PEG ratio, which measures the firm's price-to-earnings ratio divided by the growth rate of its earnings. Deckers' 0.54 PEG ratio comes in well under this model's 1.0 upper limit - a sign that the stock is a bargain.
Another reason the Lynch-based model likes Deckers: The firm has no long-term debt.
The Gift: Monster High Action Figures
The Stock: Mattel Inc.
Think Glee meets Twilight. Mattel's Monster High line of toys envisions a high school attended by the offspring of famous monsters. (Among the students: "Draculaura," "Frankie Stein" and "Clawdeen Wolf.")
Kids are big on the Monster High toys, but my models aren't too high on Mattel. While it has a solid balance sheet - its long-term debt is less than half its net current assets - Mattel has been growing at just 3.1 per cent over the long term, and it's not cheap, selling for 3.2 times book value and at a yield-adjusted PEG ratio of 2.15.
The Gift: The iPad
The Stock: Apple Inc.
Apple's latest creation has been a big hit among techies, with about 7.5 million of the touch-screen tablets sold in the past two quarters. The iPad is bigger than Amazon.com's Kindle and more costly, with the least expensive version running $549. But it also has more features, with Web browsing and e-mail capabilities and access to a myriad of apps.
There's been a good deal of Kindle-against-iPad debate, but, in terms of the companies behind the two tablets, my models have a clear verdict. Apple gets a 100-per-cent score from my Martin Zweig-inspired model. It likes Apple's long-term EPS growth (58.2 per cent) and long-term sales growth (36.6 per cent). It also likes the fact that recent EPS growth has been even better, coming in at 67.5 per cent in the most recent quarter (compared with the year-ago quarter).
The Gift: Scrabble Flash Cubes
The Stock: Hasbro Inc.
Amazingly, with all of the high-tech toys and electronics on the market, the No. 2 bestseller in the Toys and Games category on Amazon is good ol' Scrabble, albeit in a new incarnation. Designed for those age 8 and up, Scrabble Flash lets users play three different Scrabble-related games using electronic tiles.
Hasbro's shares aren't exactly a triple-word score, though, as none of my models have interest in the stock. There are some redeeming qualities, like the firm having raised its EPS in eight straight years. But the stock isn't cheap, trading for about 4.5 times book value; it has a debt/equity ratio of more than 100 per cent.
Full disclosure: I'm long AAPL and DECK.
John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the Omega Consensus funds. Globe Investor has a joint venture with Validea.ca., a premium Canadian stock screen service.
John Reese