Should You Follow Ron Baron’s Money?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On July 8, 2013, Ron Baron appeared on CNBC and predicted that the Dow will reach 30,000 in 10 years and 60,000 in 20 years. This is simply based on a compounded rate of 7% annual growth. He also stated, “Companies have almost doubled their earnings in the past 13 years while stock prices have only increased 25 percent.” While this might be true, it has become frighteningly evident that top-line growth has been subpar.

Investors should know that 12 of 30 (40%) of Dow-component companies saw revenue declines in 2012. These companies include Chevron, Exxon Mobil, United Technologies, JPMorgan, Alcoa, Merck, DuPont, Bank of America, IBM, Pfizer, Intel, and Hewlett-Packard.

These trends might change, but this isn’t about pointing out specific companies that are underperforming. The ultimate point is that many large-cap companies are incapable of growing revenue in a highly accommodative economic environment. Therefore, if monetary stimulus measures were removed, many stocks would be susceptible to strong downside moves. Companies, big or small, can improve earnings by cutting costs, but that trend isn’t sustainable over the long haul; top-line growth must be present, as it indicates real growth.

All that said, it’s possible that American companies are so adept at cutting costs and maneuvering to meet or beat expectations that Ron Barron is correct. If you think he's right and you want to invest along with him, then you should know that he recently poured some money into Dick’s Sporting Goods (NYSE: DKS). Even if you disagree with him on the broader market, perhaps you'll agree on this specific investment.

A hungry company

Unlike the 12 companies listed above, Dick’s has managed to consistently increase annual revenue. Earnings have also improved on an annual basis; however, Dick’s reported a loss in 2009. Therefore, it’s not resistant to a weakening consumer. It’s also not resilient to broader market corrections, as the stock depreciated approximately 40% during The Great Recession. On the other hand, the stock held up better than Foot Locker (NYSE: FL) and Finish Line (NASDAQ: FINL), which both lost about 50% of their value.

Dick’s currently owns 525 stores throughout the country, and it plans on opening 40 new stores throughout 2013. Eventually, it wants to have a total of 1,100 stores in the United States. This might be a little ambitious. 

Dick’s is playing into health and fitness trends. It offers traditional sporting goods and apparel, but it also caters to those interested in exercise equipment. Additionally, it has marketed to a growing number of fitness-oriented female consumers. According to Alexa.com, females are slightly overrepresented at dickssportinggoods.com, which might come as a surprise to many people. Also according to Alexa.com, pageviews and time-on-site have slightly increased over the past three months.

Management expects revenue to increase 3% in 2013, and RBC Capital recently rated Dick’s a “Sector Perform” and set a $55 price target. 

Related options

Foot Locker’s vision is “To be the leading global retailer of athletically inspired shoes and apparel”. The company’s goals include being customer-focused to help drive performance, to make stores and Internet sites more exciting, to deliver exceptional growth in high-potential business segments, and to aggressively pursue brand expansion.

These goals seem to be working considering revenue has improved over the past three years. According to Alexa.com, traffic for footlocker.com has steadily improved over the past two years. Time-on-site and bounce rate have also improved over the past three months, which indicates that people are staying on the site longer. This is a positive sign as it increases the odds of a sale.

Finish Line has also increased revenue over the past three years, but earnings declined last year. Earnings also declined 17% last quarter. However, this was better than expected, and costs related to the company’s deal with Macy’s played a role.

Finish Line aims to have 180 shops in Macy’s stores by the end of the year. This is something to build on for Finish Line, as revenue increased 10% year-over-year and same-store sales jumped 2.4%.

However, on a fundamental basis, Foot Locker looks to be the strongest option of the three companies mentioned. The difference in yield definitely plays a role. You'll also notice a much lower short position for Foot Locker than its peers, which indicates more investor confidence in Foot Locker. 

 

Dick’s

Foot Locker

Finish Line

Trailing P/E

21

14

18

Profit Margin

5.07%

6.52%

4.36%

Dividend Yield

1.00%

2.60%

1.20%

Short Position

4.70%

2.60%

12.10%

Conclusion

Dick’s has been a success story for years, and the company still has a lot of room to grow. If it more than doubles its store count and the consumer is healthy, then it could lead to tremendous investor rewards. Unfortunately, that’s a big if considering the consumer is facing a myriad of headwinds. If Dick’s expands to its desired number of stores and the consumer weakens, then the company may have too many unprofitable stores.

Foot Locker and Finish Line are also highly susceptible to a weakening consumer, which make them risky plays as well. If the consumer manages to hold on, then both companies are well-positioned for future growth. If not, then aggressive expansion plans could hurt profitability.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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