• Most consumer services concepts fail in the long run, so any investment
in a company in the speculative or aggressive growth stage of the busi
ness life cycle needs to be monitored more closely than the average stock
investment.
• Beware of stocks that have already priced in lofty growth expectations.
You can make money if you get in early enough, but you can also lose
your shirt on the stock's rapid downslide.
• The sector is rife with low switching costs. Companies that establish store
loyalty or store dependence are very attractive. Tiffany's is a good exam
ple; it faces limited competition in the retail jewelry market.
• Make sure to compare inventory and payables turns to determine which
retailers are superior operators. Companies that know what their cus
tomers want and how to exploit their negotiating power are more likely to
make solid bets in the sector.
• Keep an eye on those off-balance sheet obligations. Many retailers have
little or no debt on the books, but their overall financial health might not
be that good.
• Look for a buying opportunity when a solid company releases poor
monthly or quarterly sales numbers. Many investors overreact to one
month's worth of bad same-store sales results, and the reason might just
be bad weather or an overly difficult comparison to the prior-year pe
riod. Focus on the fundamentals of the business and not the emotion of
the stock.
• Companies also tend to move in tandem when news comes out about the
economy. Look for a chance to pick up shares of a great retailer when the
entire sector falls—keep that watch list handy.
