Investment specialist and former AOL Finance Editor Hilary Kramer shows how to sleuth out stock picks from everyday life. From Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends
Your Teenager May Know More than You
Spend, spend, spend: there seems to be no end to the cost of having children. While you may find yourself paying through the nose for things for your children — from the designer clothes they are begging to buy, to the schoolbooks they need for studies, to the toys they choose to play with — the truth is, if you are carefully attuned to their habits, they can help you make back some of the money you have to spend on them. Who says kids don’t know anything?
Kids tend to be much more tuned into the tiny changes in products and services that may turn into trends. Every day at school, they are exposed to what amounts to a minimarket of other kids all displaying things that are hot and things that they love. This is why many companies spend a good deal on focus groups trying to pick the brains of children.
For a perfect example: my friend’s daughter tipped her off to the MySpace.com phenomenon well before many investors discovered this online social networking community. If only she had shared the tip with me! I could have bought shares in Intermix, the company that owned MySpace, back in March 2004 when the stock price was still below $3. If I’d bought then and held the stock until October 2005, when Rupert Murdoch’s News Corp. bought Intermix to get MySpace.com, I’d have received $12 a share. There were lots of incentives for me to dump my shares in the meantime, as there was an investigation of Intermix by the New York State Attorney General. (Intermix ultimately paid $7.5 million to settle the case.) In the end, my $1,500 investment in March 2004 would have made me a cool $4,500 in about a year and a half.
Listen to Your Neighbors
You may not like their taste in decorating or their barking dog, but as a savvy detective, you can learn surprising amounts from those people around you but not close to you. Talk to everyone you can — not just the neighbors but your plumber, your electrician, the guy bagging your groceries, your lawyer, and your mom. Ask questions. Find out what they think is hot, exciting, novel, useful. In short, find out how they are spending their money.
Back in 2003, a friend who sadly was battling multiple sclerosis called me, excited about a new injectable drug that would help her manage her illness. I checked out the drug online and did some research. It was being manufactured by Teva Pharmaceutical Industries Ltd. (TEVA). This is an Israeli generic-pharmaceuticals company. At the time, it was at $17 a share, and it had solid financials and good management, so I snapped some up. Today, at the time of writing this book, it is up to $35. And during 2006, it had gotten as high as $46.
I never leave home without my detective magnifying glass. In August 2003, for example, I went to visit my best friend’s parents in Odessa, Texas. I wasn’t planning on learning anything — just going to relax with people I love. My friend’s father is a salesman for Weatherford International Ltd. (WFT), which provides equipment and services for oil well drilling. Weatherford helps oil and natural gas companies determine where to drill, and offers equipment to access the oil and gas as well as pipelines to transport it. We went with my friend’s father to visit his clients. They all were buying machinery and equipment. But the problem, I was told, was that there wasn’t enough equipment and labor to fulfill all the demand for oil.
That was all I needed to know. It was clear that oil and gas companies were going to need to increase their production, and that a company that could help them accomplish this was going to make lots of money in the coming years. When I returned home from the trip and did some more research on Weatherford and its financials, I was all the more convinced. I bought WFT at $18, and I sold in the summer of 2006 for $50.
Patterns and Connections
Like a good PI, connect the dots. If your daughter is listening to an iPod and your hairdresser and your cousin in Minnesota are also listening to iPods, that should tell you something. Look for widespread trends. If you see the same trend emerging in distant parts of the country, there’s a great chance it’s for real. A friend of mine is a pilot for a major airline. In the summer of 2004 she started complaining about how children were bringing these stuffed animals in boxes onto the plane and taking up seat space. I thought to myself, How odd. A stuffed animal that is so popular that a pilot is noticing them on the planes!
I inquired some more. Turns out, my pilot friend was referring to the signature Build-A-Bear boxes. I looked up the company online and saw the amazing potential in this retail-tainment concept, in which parents can take their young children to build and customize their own bears. But being wowed by an online description is nothing like seeing it with one’s own eyes. I went to my local mall and noticed the line snaking out the Build-A-Bear door. Research into the company’s S-1 filing (which is the financial and business description form all companies must file with the SEC before a public stock offering) confirmed the store’s popularity. Between 2001 and 2004, the company more than doubled its number of stores from 71 to 150, and its revenues doubled from $106 million to $213 million, all while more than quadrupling net income from $1.9 million to $8 million.
So as soon as it went public in October 2004, I bought 1,000 shares at $25 a share. Within a couple months it was at $35; I was tempted to sell, thinking it had become overvalued by investors, but I didn’t want to take the tax hit on such a quick transaction. (Holding a stock for more than a year allows you to treat the sales as long-term capital gains: taxed at 15 percent versus your normal income tax rate.) So I held it, and watched the stock drop to $30 — and then to $20 by the summer of 2005. It seemed many investors had decided this was a fad and were selling as soon as the stock started dropping, but I was still seeing the Build-A-Bear stores packed whenever I went to the mall, so I refused to take a loss. Sure enough, the stock began climbing again, and as soon as it got up above $30 in late 2005, I sold my shares (at around $31) for a gain of about $6,000, or about 24 percent, and a much smaller tax hit than I’d have incurred if I’d sold it in the summer of 2005.
Go Where the People Go
The previous example feeds directly into this helpful hint. Follow the crowd, whether it’s the line snaking around the mall leading to Build-A-Bear or the one at the register at Sephora. Crowds tell you more than the financial pages can ever predict. When you’re hungry, and you walk into a new Mexican chain restaurant in Washington, D.C., and find it packed with people, and the same thing happens in a few more cities, or friends in other cities mention the chain, you should make note that people really seem to be liking Chipotle. That’s what happened to me in early 2006. So I looked up the company, liked how its financials compared with those of industry peers, bought the stock around $45, and have watched it climb to $80. I’ve made a nice return on it, and I enjoy the food a little more each time I go.
I have also made money by paying attention to the growing lines in the dressing rooms of some of my favorite stores. I’ve always been a huge fan of TJ Maxx and Marshalls, and I’m not afraid to admit they’re my favorite places to shop. It’s not just the satisfaction of finding nice clothes that look great and cost half, or even a third, of what I’d pay in a department store (forget about a boutique). It’s not even the secret pleasure I get when my fancier friends or colleagues ask me if I got my fabulous outfit at some chic retailer. For me, shopping at TJ Maxx is like treasure hunting — it’s a game, and I thoroughly enjoy it even when I don’t find anything to buy. Much of the fun is in the search.
I’d been shopping at these stores for years when I noticed it was getting harder to find things, and the lines were much longer at the dressing room and at the cash register. This was back in 2000, when the economy was starting to slow down. The stock markets were declining even as the average American’s share of stock holdings was nearing an all-time high. Large corporations were in cost-cutting mode, which threatened to leave many workers unemployed. This, after a few years of dot-com excess, left many consumers with high levels of personal debt. As I waited in line to check out at TJ Maxx one day, I realized the crowds were there for a special reason: with the economic future less certain, people were trying to cut costs where they could, and were going to the discount stores in much larger numbers.
I went home that afternoon, did some research on the TJ Maxx financials, and bought shares in TJX, the ownership company, when the price was still below $10. Since then it has risen steadily, and my investment has nearly tripled as the stock price has climbed toward $30. It’s been a bit more volatile than I would have liked, as the companies that sell excess merchandise are managing their inventories better, and thus there are fewer overruns for TJ Maxx to offer, but I’m continuing to hold it. I believe the desire for cheap, quality clothing is a long-term trend, though of course, as with all the stocks in my portfolio, I’ll keep monitoring the situation closely.
ABOUT THE AUTHOR
Hilary Kramer, a global investment specialist and author of Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Copyright © 2007 by Hilary Kramer), is the former Finance Editor of AOL and also serves as the AOL Money Coach. Her expertise in investing spans more than twenty years of experience in equity research, asset allocation, and portfolio management. She graduated from the Wharton School with an MBA, and within a decade she was recognized as one of the best equity investors on Wall Street and had amassed a personal fortune of more than $10 million. She has since then devoted her energies to helping individual investors apply the simple secrets that she used to bring her wealth and freedom from financial worries. She appears regularly as a commentator on the Nightly Business Report on PBS and has provided market commentary to The Wall Street Journal, Fox News Channel, ABC, Bloomberg, and CNBC, among others. Hilary also appears daily on the nationally syndicated radio show Doug Stephan’s Good Day. She has held directorships in both NYSE- and NASDAQ-traded companies and, from 1994 to 2002, was the senior managing director of a $5.2 billion global investment fund with both private equity and publicly traded securities.
- Read Chapter 1 of Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends
- See the book’s Table of Contents