Christmas is coming, and that means two sets of flurries are on the horizon – snow and retail news. Now that the aftershocks of the 2008 financial collapse have had time to set in, this year will be a test to see how resilient consumers are in spending for the holidays. Retailers, for their part, have been preparing by slimming down; most are carrying record low levels of inventories to avoid the need for post-rush markdowns. But as the fundamentals are uncertain, retail stocks have been rallying with the rest of the market – the Retail HOLDRs ETF (RTH) is less than 13% off its all-time high in July 2007, led by large allocations to Wal-Mart (WMT), Home Depot (HD), Target (TGT), and Walgreen’s (WAG).

Large-cap, diversified retailers lack the appeal of a growing niche apparel company, for instance, but in many cases they look to be safer bets with decent upside in a market that’s looking increasingly overextended. Wal-Mart and Home Depot attract my attention with relatively stronger moats for the retail industry and a consistent history of posting ROEs in the double-digits, and although they trade at higher earnings multiples than a company like GameStop (GME), I believe the sustainability of earnings favors the stodgier retailers. Earlier this year, investment funds that I co-manage (BCIC) sold GameStop stock on a belief that it is a value trap with illusory single-digit forward earnings multiples, as competition for video game sales increases, and video game makers look to connect directly with consumers and disintermediate brick-and-mortar stores. That stock is down 15% in the last week and is close to its 52-week low, one of the exceptions in a market that is making new 52-week highs.

There will be plenty of news on short-term sales trends involving consumer spending in the month of December, but there might be limited comparability with past years because the paradigm may have shifted in this newly frugal economy. If you’re going to play with retail stocks, then, stay high quality and go with solidly entrenched middlemen. Bed Bath & Beyond (BBBY) is one retailer more off the beaten path that also fits that definition – a differentiated inventory strategy, improved pricing power after the Linens ‘n Things bankruptcy, and a modest valuation – and I’m happy BCIC owns it.
On the apparel front, Goldman Sachs (GS) analysts believe the sweater will be the go-to gift of 2009; while apparel is admittedly not my specialty, BCIC recently established a position in Ralph Lauren (RL).

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Originally posted here.

I have not posted in a long time, having been busy interviewing for post-graduation jobs, but I just received an email from Forbes asking a question that was eerily relevant to the situation many of my peers find themselves in – it read,

“Recently, the U.S. Bureau of Labor Statistics reported a jump in the unemployment rate to 10.2%. Some economists think we could be looking at 10.5% by early next year. Given these grim forecasts, how do you counsel recent college graduates and others entering the job market for the first time in this employment climate? Is there any advice or strategies you find particularly useful?”

After interviewing for a number of finance jobs, I wound up with several offers, including two doing equity research at large buy-side firms – exactly the position I wanted. Forgiving the somewhat cliched headings (I hope the descriptions make up for it), I found the following things beneficial, and hope they can be used in your personal situation:

Know what you want
It sounds trite, but the number of students who don’t have a good idea of what they’d like to do after college is surprisingly high. If you don’t know what you want to do, why should an employer hire you?

In my case, I identified investment management as a dynamic, intellectually challenging field that would hold my attention and challenge my analytical abilities early on. Do some introspection and examine what skills you have, then figure out where they’ll be put to good use in an enjoyable way. There’s no substitute for putting in the time to think.

Show your passion
Once you’ve identified what you want to do, capture it on your résumé by involving yourself in a relevant activity. If you actually want to be in a certain line of work, this won’t be a huge imposition. Should a readily apparent method of accomplishing this not be handy – there might not be a club at your school, or a field/service trip, a study program, etc. – then get on the internet. Find people doing what you want to do, and contact them. If everything comes up empty, start a website– it doesn’t have to be a grand production, just steady documentation that you’re trying to learn about something.

I started my website because I was bored during exam week freshman year. Through it, I’ve been read by tens of thousands of people, invited to write for much larger publications, and had opportunities to meet and talk with dozens of incredibly helpful people in the finance industry.

Put in the time
As the first point said, there’s no substitute for actually investing the time positioning yourself to get hired. The word choice is intentional; learning about what you want to do really is an investment in your future. A willingness to study countless hours for classes in tangential (at best) subject areas while spending no time planning a destination after college is simply short-sightedness and poor strategy. Whatever is fundamental to the job you want to be hired in, you should be actively learning right now.

I’ll often be talking to other students who want to enter finance, and they’ll ask what books I read to get to the level of knowledge they think I have. Though I don’t give this answer, I conservatively estimate that I’ve spent more than 6,000 hours reading anything and everything about investing, financial markets, etc. that I’ve come across. That translates to 3 full years of 40 hour weeks, and I think that is on the low side.

Is that time commitment necessary for everyone? It’s just something that I did – and it does have its drawbacks beyond the obvious skipping of college bar happy hours. At least two jobs I interviewed for didn’t extend me offers because they felt my level of background knowledge would have made me a poor fit for their entry level program. I’m encouraged by that long-term, however, because it should help me at places which are more flexible and offer greater responsibility sooner.

Go deeper in certain areas
Knowing what you’re interviewing for is too broad a suggestion and should be a given. To stand out in an interview pool against similar students who have similar course work, dig deeper into a few specific niches in the field you’re interviewing in, so that you know them better than anyone else your interviewer will see that day. My areas were railroad business models and valuations (I was lucky that Mr. Buffett made his acquisition when he did, my thanks to him), as well as credit default swaps – esoteric, yes, but very effective because I know them well.

Having familiarized myself with countless companies over the past several years, it was also much easier to discuss General Electric (GE), Freeport McMoRan (FCX), supermarkets, agriculture, pharmaceuticals, and certain retailers, depending on the sector background of the person interviewing me. All of those made appearances, and I happen to have done research into each of them previously.

Create and sell a narrative
In the end, a résumé is piece of paper with data points. The goal of an interview is to turn those data points into a story that’s easy to remember because it’s so compelling. On paper, I’m a finance major with a good-but-not-great cumulative GPA who is also the vice president of my school’s investment club. In an interview, I can talk about major market events that occurred pre-housing bubble, display an odd fascination with poorly-performing small-cap railroads, and can relate my involvement with investment club to at least one stock in the universe of the person interviewing me. That turns the relatively boring data point of “extensive investing study” into something worth remembering – everything on your résumé should come with a catchy, memorable story mentally attached.

Since I’ve probably taken away valuable time that can be used to start with #1, I’ll conclude by saying that there’s no substitute for working hard, that the time invested is worth it, and that jobs are not impossible to come by if you’re willing to set yourself apart by prudently picking a direction and then following it with everything you have.

A final note – writing this made me reflect on the journey. Thanks, Mom and Dad, for humoring my odd interest from a young age, caring so damn much that I do well, and putting your wants behind an education that couldn’t have been easy to afford.

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Sulaman Chaudhry and Andy Cole send: Last week was very interesting for a number of reasons, the main one being that many of our trendlines remain intact:

The S&P 500 has been forming a rising wedge over the past six months now, and is eventually going to be forced to breakout to the upside or the downside within the coming months. There are two things we need to take note of here: the first being the negative divergence we are seeing in the MACD, the second being the increase in selling volume over the past few days. Looking at this objectively, this is definitely bearish for the markets.

As we mentioned a few days ago, we have seen gold (ETF: GLD) consolidate a bit over the past few days. On a daily chart, the GLD formed a double top, and proceeded to break out of an uptrending channel that had been in place since two weeks ago. We would look for a bit more selling in the GLD from here.

Similarly, the UUP dollar ETF has experienced a double bottom over the past week or so and looks to be headed higher from here. Again, we mentioned the heavy increase in volume on the UUP in the last post, and it looks as though that did prove to be a short-term bottom. Keep an eye for clues such as this to help determine future trends.

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After Buffett’s investments in a handful of major railroads – Union Pacific (UNP), Norfolk Southern (NSC), and most notably Burlington Northern Santa Fe (BNI) – the industry garnered plenty of attention. The attractive industry dynamics and a myopic focus on the major players makes me interested in the small number of publicly traded regional railroads – among them Kansas City Southern (KSU) and Genesee & Wyoming (GWR).

Why railroads? Foremost, it’s an industry with significant tangible barriers to entry, and it provides a vital economic service. Although fixed asset investment is substantial, I also believe that the general consensus underestimates the variability of the typical railroad’s cost structure – yes, there’s operating leverage there, but there is also room to reduce headcount as unit volumes decline. Below is a graph of quarter-over-quarter revenue growth compared to QoQ operating expense growth for two major carriers (Norfolk Southern and CSX), one larger regional (Kansas City Southern) and the short-line amalgamation G&W.

A fixed asset business is going to have scale, but there’s still a fair degree of correlation for those companies. For the quarterly dataset going back to the beginning of 2006, the slopes vary from 0.51 (NSC) to 0.87 (GWR), so some flexibility exists in aligning expenses with revenues.

Next is a list of several metrics used to compare the four railroads, focusing primarily on their track infrastructure. Although other equipment is needed to operate a railroad, the real economic asset I’d be buying is the network.

A few explanations: there’s a strong correlation between revenue per track mile to market value per track mile. I chose to use enterprise value in addition to market cap, since these rails all have some level of debt attached and the end results cluster around 2.5x revenue per track mile. Also, the capital spending necessary to maintain the track network is important, and for the larger and more continuous players, spending is substantially higher than for a fragmented short-line company like G&W.

One red flag that makes me tread with caution is that railroad stocks have generally seen a robust recovery since the March lows, though I’m wary of mentally anchoring to those prices. On the whole, the rail industry has several positives about it – so even if a cross-section of some stocks don’t show any great bargains, it’s an understandable industry with competitive advantages, and that means good returns can be obtained at the right price.

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Sulaman Chaudhry and Andy Cole send: Hope you all had a great weekend. Let’s look at a few charts:

The S&P looks to be forming a rising wedge of sorts. A break to the downside would definitely be bearish, but until that happens, which it most likely will, the trend is up and continues to be for now.

After that high volume breakout on the Gold (ETF: GLD) chart a few weeks ago, we’ve seen a nice bit of consolidation around that 100$ level. For those traders banking on a move past 100$, this is definitely healthy in order to have a sustained move higher.

The head and shoulders that we have been on top of since February is still in play. A break above 100$ should lead us to a target price of 115$ on the GLD over the course of a few months.

There was a strong surge in volume on the U.S. dollar (ETF: UUP) last Friday. Whether this will form some sort of short term bottom remains to be seen, but it’s something to keep an eye on.

Finally, take a look at Hecla Mining (HL). This stock has seen a surge in buying volume over the past few weeks as it completed a cup and handle breakout, which was no doubt influenced by the pennant breakout in gold. We would look for a retest of $3.90 on the downside as nice entry position.

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