There have been some questions from blog readers about what is causing the huge drop in Garmin (GRMN) and Coach (COH). Here is a quote from a front page article titled "Retailing Chains Caught in a Wave of Bankruptcies" in the New York Times:
“The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.”
Coach and Garmin both sell stuff that people don’t need. Coach even more so than Garmin... Well, my daughter would argue that a new Coach purse is a necessity while a GPS device can be replaced by a map and a compass, so there.
Still, neither makes food, water or air... so in down turns Mr. Market acts like the whole world of retail is ending, and he wants to sell all retail stuff so badly that he begins to dump even the really good ones at lower and lower prices...
...which, since Mr. Market isn’t quite as rational as they’d like you to believe, makes Mr. Market even more afraid of retail, and so he wants to sell more, which makes the price go down, even the good ones, and makes him even more afraid, and so he wants to sell more... and so it goes. Until enough Big Guys decide that Mr. Market overdid it again and that the price for the really good retailers, the ones with a big brand moat, is so low that it makes sense to buy them now.
Which is why, grasshopper, that I want you to really get good at an industry. Become an expert. When you are really good at something, you know its value and you’ll know when Mr. Market has outdone himself yet again... either by pricing it way too high for the long run or way too low for the long run.
So What's Happening to COH and GRMN?
Mr. Market was panicking out of these retail-oriented stocks because they can’t sustain those big profits in a retail downturn.
It doesn’t matter to Mr. Market that the downturn eliminates competition for the big Moat retailers. The Big Guys were sneaking out the door of the retail theater because they smelled smoke. At least that was what was happening after Christmas.
The Big Chart
By the way, I know that because Investools has a tool called the Big Chart that tracks the flow of institutional money for all industry groups.
In the case of COH, for example, the Apparel Group, which Coach is a part of, hit its low in January. And it's been rebounding ever since... As has the price of COH stock, which hit the low $20’s in January and is now at $31.
So a couple of points:
- You have to know the industry and the business 4Ms.
- You have to watch the big guys and trade with them, not against them.
What Next?
COH’s group has already turned. In
Garmin’s case, the group it's in -- scientific and technical instruments
group -- is still taking it down. Here’s the $SCIINS group chart from
Investools:
Click to see a larger pop-up image.
You read this thing from right to left. The higher the number, the relative strength of the Big Guy investing in that group.
The number was 50 back in January, and now it's down to 15. It can go to 0. What this tells us is that the big guys haven’t started turning into this group yet. Not at all. They might start tomorrow. They also might not.
I would wait on this until they move. No matter how wonderful the business and no matter how cheap the stock is relative to its value, it can still go down another 50% if the big guys sell it off. So we don’t let our egos get in the way. We don’t get married. We just like the business at this price and then wait until the Big Guys start buying again.
What if you don’t like trading? There is another way to go. More on this soon.
Now go play.
