Monday, May 18, 2009
(Cont'd from above)...

Jim (cont'd):   

A call that helped spur the whole market higher today… sending the Dow up 235 points… and the S&P 500 up 26 points and change… even though you know that nobody here other than me, thought that the market could go up again after last week… now, you have probably heard numerous times that Lowe’s reported a better quarter than expected… okay, which is why the stock rocketed up $1.50... but that in itself does not tell us much that is useful… back in my old hedge fund when I was managing a half a billion dollars, what would have mattered to me is why Lowe’s did better… and what the takeaways are… and that is what should matter to you.

First, why did Lowe’s have a stronger than expected quarter… I mean you have got to listen to this call, because it was because of foreclosures, and the real estate cycle… which anyone who has bought a house in the last few years is probably aware of by now… here is how the real estate cycle plays out… the cycle starts with prices roaring higher, and then topping out… and that is stage one… in stage two, the cycle virtually comes to a halt… as the buyers refuse to pay up and the sellers won’t come down enough to sell their house… now that is the worst stage for an outfit like Lowe’s… because Lowe’s needs people to want to fix up their homes… either to help them get it sold, or improve them right after they have bought… so the stale mate is the worst possible time, okay… and we were in stale mate mode.

The metric that turns out to matter more than anything else for Lowe’s is turnover… meaning how often homes are sold… and that is why stage three, where we are now, is where the company really shines… this is the moment where the sellers and buyers finally meet… and the velocity of sales explodes… whether it is due to lower prices, or more likely foreclosures… the fact is that the velocity of housing sales, particularly in California, is now roaring… stage four where housing bottoms comes right after that huge increase in the velocity of home sales… always has, ever since the housing cycle began… that is when the inventory of houses has shrunk to unsustainable levels leading to the inevitable bottom in pricing that Lowe’s says we are already seeing in key portions of the country … I think that it validates my once mocked June 30th housing bottom call.

Foreclosures help… because they bring out bargain hunters, who are now attracted by low prices and low interest rates… remember, the velocity did not pick up as long as housing prices stayed high and as long as mortgage rates are high… we cross the key line where it becomes more affordable to buy than to rent, then the sales explode… after listening to Lowe’s conference call, that is where we are.

Alright, so that is fine… it is all well and good… that is an economics class, that does not help me Cramer… alright, how does it help you make money… what is the real takeaway… what is the stock takeaway… this is how the process of stock picking should work, you ask and then you answer these questions… so let’s do it… when the velocity of home sales picks up, people have a reason to fix up their houses… both the buyers and the sellers… and even if the sellers are the banks that own the foreclosed property… from the generic comments on the conference call we can then built a mosaic that tells us what is selling at Lowe’s… Lowe’s talked about sprucing up a foreclosed home… how do you spruce up a foreclosed home in order to sell it… well, they gave you some hints… you fix the lawn… the you fix the gardens… you throw a new coat of paint on the darn thing… these are the two cheapest cosmetic ways to fix up a house when you are selling it, or when you are buying it… so we think paint… Lowe’s said paint… when you think paint you should think Sherwin Williams, well obviously with the stock up more than $2 in the rally today, you could argue that others have already figured this out… but I think there is much more upside to come… and I would still buy it up here.

And then there is the lawn, and here I want to circle back to a stock that jumped out to me as the single best play off of the Lowe’s conference call, and it still is not moving as it should be… and that stock, which we have emphasized because we smell a bargain… not just fertilizer… is Scotts Miracle-Gro Co. (SMG)… remember we had the CEO on just last week, saying that the overreaction to the stocks last quarter where they did not raise their estimates, was way over done… today that thesis got some serious validation… Lowe’s went on and on about how outdoor products… not indoor products like plumbing… outdoor products, grass products flew out the door… especially in hard hit foreclosed markets like California… Scotts was twice blessed on the call, because Lowe’s also said that the surging in at home gardening was unprecedented… and it counted for much of the unpredicted upside… Lowe’s experienced a remarkable 20% increase in year over year comparison… remember, every other comparison is down right… and that was for vegetable plants and seeds… and to me that is the kind of empirical data we need to transcend the anecdotal case for Scotts… when I make my Jersey Beef Stake tomatoes, I load them up with Scotts Miracle Grow… why, because I want to feel like I have a green thumb, okay.

When you consider that Scotts also has Smith & Hawkin furniture, which they sell thru Lowe’s… that is where I got my outdoor furniture… I am thinking wow… and if Scotts would just get out of that brutal stand alone retail game, and just close Smith & Hawkin and sell their stuff thru Lowe’s … then I think that this $35 stock, only up .75 cents today on a huge day for the market… could become a $45 stock, as soon as we get a new report card from the place… maybe Scotts is thrice blessed… Lowe’s said, and this is my favorite part of the call… Lowe’s said that the 1990’s the early part of this century, were all about the DIFM movement… now I was scratching my head, DIFM… and the answer is, that is the Do It For Me movement… I mean people in this country had to Do It For Me… that is what they were doing, they paid other people to take care of lawn and gardens, and stuff like that… and now with a downturn in the economy, it is about a return to Do It Youself, DIY… which means you buy lawn care products yourself, and the name people reach for is Scotts… I do not even know the other guys.

I think we are in the early innings in this move… I think that people should feel comfortable buying Scotts right now… and buying Sherwin Williams and Lowe’s on the inevitable pullback… although, I do not mind Lowe’s under $20... why do I think that it is inevitable, consider last weeks glue, would you… did you hear a soul who said buy this market, besides me… I didn’t.

Here is the bottom line…

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The Bottom Line!:     Last Friday night I said that you have to listen to the Lowe’s conference call to make up your mind about what is happening… I said that Lowe’s would give help give us our frame of reference… not the aggregate consumer spending numbers, which were very weak and you never would have bought a stock off of those… not the national retail sales number, which are very weak and simply aren’t representative of what we are talking about… and again, you would have been short the market, betting against is if you bought it on those big numbers… we have boots on the ground data, and that is from Lowe’s… and we know what to buy, and how to profit from it… if you were on that call and you heard the comments and bought Lowe’s, or Scotts, or Sherwin Williams, you were thinking like a smart hedge fund manager… fortunately for you, there are not that many smart hedge fund managers out there to figure all of this stuff out… which is why these opportunities exist… just like the customers at Lowe’s, I see you as a do it yourself person… not a do it for me investor… you can do it yourself… got to the Lowe’s website, listen to the call, go back to the Scotts story from last week, look at the market shares that Sherwin Williams has… and pull the trigger on one of them when you get comfortable enough to spruce up your portfolio with one of these great stocks.
Now, Lowe’s sent the market soaring today… which is why I told you on Friday that you have to listen to conference calls… and the takeaway, yes Lowe’s is good, Sherwin Williams is good… but Scotts Miracle-Gro Co. (SMG)… go get a green thumb, go pick up some SMG.

[verbatim recap]

[verbatim recap]

[end of segment]

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