Beating the Street (23 page)

Coca-Cola Enterprises had gone down in price, but this bottler's prospects were gloomier than before, so I rejected it. Fannie Mae had gone up in price, but its prospects were excellent, so I put it back on my list for the seventh year in a row. Just because a stock is cheaper than before is no reason to buy it, and just because it's more expensive is no reason to sell. I also decided to repeat my prior recommendation on Phelps Dodge and two savings and loans, for reasons I'll discuss later.

The Retail Sector

After examining my previous year's selections and finding five that might be worth recommending again, I began my search for new selections in the usual fashion. I headed straight for my favorite source of investment ideas: the Burlington Mall.

The Burlington Mall is located 25 miles from my hometown of Marblehead. It's the huge, covered variety of mall, of which there are only 450 or so in the United States, and a delightful atmosphere in which to study great stocks. Public companies on the way up, on the way down, on the way out, or turning themselves around can be investigated any day of the week by both amateur and professional stock shoppers. As an investment strategy, hanging out at the mall is far superior to taking a stockbroker's advice on faith or combing the financial press for the latest tips.

Many of the biggest gainers of all time come from the places that millions of consumers visit all the time. An investment of $10,000 made in 1986 in each of four popular retail enterprises—Home Depot, the Limited, the Gap, and Wal-Mart Stores—and held for five years was worth more than $500,000 at the end of 1991.

Driving to the Burlington Mall takes me down a memory lane of many other retailers I've bought and sold in the past—beyond Marblehead I pass two Radio Shacks (owned by Tandy—$10,000 invested there in the early 1970s would have resulted in a $1 million payoff, had you gotten out when the stock peaked in 1982); a Toys “R” Us,
which went from 25 cents to $36; a Kids “R” Us; an Ames Department Store, a reminder that the lowest a stock can go is zero; and a LensCrafters, a large division whose problems were a drag on U.S. Shoe.

Approaching Burlington from the north on Route 128—the source of many of the famous “go-go” technology stocks of the 1960s, such as Polaroid and EG&G, when this area was America's original Silicon Valley—I exit the thruway. Beyond the exit ramp, I pass a Howard Johnson's, a great growth stock in the 1950s; Taco Bell, a wonderful stock until Pepsi took over the company, and a boost to Pepsi's earnings since; a Chili's (with its charming stock symbol, EAT), which I missed in spite of my children's recommendation because I thought to myself, “Who needs another Chili's-type restaurant?”

The parking lot of the Burlington Mall is roughly the size of the entire town center of Marblehead, and always full of cars. On the far end is a car care center that advertises tires from Goodyear, a stock I bought at $65 and then regretted, although lately it's come back.

The main building is laid out in the form of a giant cross, anchored on the east by Jordan Marsh and on the south by Filene's, both formerly owned by developer Robert Campeau. Campeau bounced into my office one day, full of facts and figures about retailing, and I found his grasp of numbers so impressive that I bought stock in his Campeau Corporation, another mistake. On the north there's Lord & Taylor, now a division of May Department Stores, a great growth company, and on the west a Sears, which hit its high 20 years ago and hasn't approached that summit since.

The inside of the mall reminds me of an old town square, complete with ponds and park benches and large trees and a promenade of lovestruck teenagers and the elderly. Instead of the one movie theater facing the park, there's a fourplex down the corridor; and instead of a drugstore, a hardware store, and a five-and-dime, there are 160 separate enterprises on two floors of commercial space where people can browse.

But I don't think of it as browsing. I think of it as fundamental analysis on the intriguing lineup of potential investments, arranged side by side for the convenience of stock shoppers. Here are more likely prospects than you could uncover in a month of investment conferences.

That the Burlington Mall lacks a brokerage office is too bad, because otherwise it would be possible to sit here all day and check the traffic in and out of the various stores, then shuffle down to the broker to put in buy orders on the ones that are the most crowded. This technique is far from foolproof, but I'd put it far ahead of buying stocks because Uncle Harry likes them, which brings us to Peter's Principle #14:

If you like the store, chances are you'll love the stock.

The very homogeneity of taste in food and fashion that makes for a dull culture also makes fortunes for owners of retail companies and of restaurant companies as well. What sells in one town is almost guaranteed to sell in another, as it has with donuts, soft drinks, hamburgers, videos, nursing-home policies, socks, pants, dresses, gardening tools, yogurt, and funeral arrangements. The stockpicker who got in on the Westward Ho of Home Depot, which began in Atlanta, or the Eastward Ho of Taco Bell, which began in California, or the Southward Ho of Lands' End, which began in Wisconsin, or the Northward Ho of Wal-Mart, which began in Arkansas, or the Coastward Ho of the Gap or the Limited, both of which started in the Midwest, ended up with enough money to be able to travel the world and get away from malls and chain stores!

There were fewer opportunities to make fortunes in retail stocks in the 1950s, a decade famous for mass production and cookie-cutter houses, but still diverse in its shopping and eating habits. When John Steinbeck wrote
Travels with Charley
, he and Charley could tell one place from another, but now if you dropped them off at the Burlington Mall, then transported them blindfolded to a Spokane mall, an Omaha mall, and an Atlanta mall, they'd think they hadn't traveled an inch.

I've been partial to retailers since I was introduced to Levitz Furniture early in its 100-fold rise—an experience I never forgot. These companies don't always succeed, but at least it's easy to monitor their progress, which is another attractive quality they have. You can wait for a chain of stores to prove itself in one area, then take its show on the road and prove itself in several different areas, before you invest.

Employees at the malls have an insiders' edge, since they see what's going on every day, plus they get the word from their colleagues as to which stores are thriving and which are not. The
managers of malls have the greatest advantage of all—access to the monthly sales figures that are used to compute the rents. Any store operator who didn't buy shares in the Gap or the Limited, knowing firsthand the success these stores were having month after month, should be swaddled in ticker tape and set on a dunce stool in the window of the local Charles Schwab office. Even Ivan Boesky never got better tips than these—and he cheated.

The Lynch family has no relatives who are mall operators, otherwise I'd be inviting them over for dinner three or four times a week. But we do have shoppers, which is the next best thing. My wife, Carolyn, doesn't do as much research at the register as she once did (although she does have several friends who have their black belts in shopping), but our three daughters have more than made up for her absence. It took me a while to catch on to their excellent analysis.

A couple of years ago, we were sitting around the kitchen table when Annie asked, “Is Clearly Canadian a public company?,” which is the kind of question our family has been encouraged to pose. I already knew they liked this new carbonated drink because our refrigerator was full of Clearly Canadian bottles, but instead of taking the hint and doing my homework, I looked it up in the S&P book, didn't see it listed, and promptly forgot about it.

It turned out that Clearly Canadian was listed on the Canadian exchanges and hadn't yet appeared in the S&P book. That I neglected to pursue it was very unfortunate. After Clearly Canadian went public in 1991, the stock price increased from $3 to $26.75, for nearly a nine-bagger in one year, before settling back to the $15 level. This is the kind of return you'd be happy to get in a decade. It certainly outdid all of my 1991 recommendations in
Barron's.

I'd also ignored their positive reports on Chili's restaurants. The three girls often wore their green Chili's sweatshirts to bed, which reminded me how stupid I was not to take their investment counseling more seriously. How many parents have followed a neighbor's bad advice and bought shares in a gold mining enterprise or a commercial real-estate partnership instead of following their children to the mall, where they would have been led straight to the Gap and its 1,000 percent return from 1986 to 1991? Even if they'd waited until 1991 to follow their children to the Gap, they would have doubled their money in that one year, beating all the major known funds.

As much as we like to think our children are unique, they are
also part of an international tribe of shoppers with the same taste in caps, T-shirts, socks, and prewrinkled jeans, so when my oldest daughter, Mary, gets her wardrobe from the Gap, it's a safe assumption that teenagers at all the nation's outlets are doing the same.

Mary had initiated coverage on the Gap in the summer of 1990 by buying some of her school wardrobe from the store on the second floor of the Burlington Mall. (Here's another tip from a veteran mall watcher: in double-decker malls, the most popular retailers are usually found upstairs. The managers arrange it that way so as many customers as possible pass by as many stores as possible on their way to the busiest, and therefore the most profitable, haunts.) When the Gap had been a jeans outlet she had had a poor opinion of it, but like thousands of other teens she was attracted to the colorful new merchandise. Once again, I ignored this powerful buy signal, just as I had with Chili's and Clearly Canadian. I was determined not to repeat the mistake in 1992.

Just before Christmas, I took my three daughters to Burlington for what was billed as a “Christmas present trip” for them, but for me was more of a research trip. I wanted them to lead me to their favorite store, which based on past experience was as infallible a buy signal as you could hope to find. The Gap was crowded, as usual, but that's not where they headed first. They headed to the Body Shop.

The Body Shop sells lotions and bath oil made from bananas, nuts, and berries. It sells beeswax mascara, kiwi-fruit lip balm, carrot moisture cream, orchid-oil cleansing milk, honey-and-oatmeal scrub mask, raspberry ripple lotion, seaweed-and-birch shampoo, and something even more mysterious, called Rhassoul mud shampoo. Rhassoul mud shampoo is not something I'd normally put on my shopping list, but obviously a lot of other people would, because the store was clogged with buyers.

In fact, the Body Shop was one of the three most crowded stores in the entire mall, along with the Gap and the Nature Company, owned by CML, which also owns the popular NordicTracks that now sit in people's living rooms. By my rough calculation, the Body Shop and the Nature Company together occupied 3,000 square feet, but they appeared to be doing as much business as Sears, which has 100,000 square feet of selling space and looked empty.

As I contemplated the bottles of banana bath oil that my children were carrying to the cash register, I remembered that a young analyst
at Fidelity, Monica Kalmanson, had recommended the Body Shop at one of our weekly meetings back in 1990. I also remembered that Fidelity's head librarian, Cathy Stephenson, subsequently had left that well-paying and demanding job (she ran a department of 30 people) to open a Body Shop franchise with her own money.

I asked one of the clerks if Ms. Stephenson was the owner of this particular Body Shop, and it turned out she was, although she wasn't in the store the day of our visit. I left a message that I was eager to speak to her.

The store appeared to be well managed, with a young and enthusiastic sales force of at least a dozen people. We left with several bags of shampoos and body soaps, the ingredients of which would have made an impressive salad.

Back at the office, I looked up the Body Shop on my master printout of stocks that Magellan owned on the day of my departure—a printout that was twice as long as my hometown telephone directory. There, to my chagrin, I saw that I'd bought shares in this company in 1989 and somehow had forgotten the fact. The Body Shop was one of the many “tune in later” stocks that I'd purchased in order to keep track of future developments, which in this case I'd obviously neglected to do. Before I'd seen it in the mall, you could have told me the Body Shop was an auto repair franchise and I would have believed it. A certain amount of amnesia is bound to set in when you're trying to follow 1,400 companies.

Through the analysts' reports from a couple of brokerage firms, I got caught up on the story. This was a British company started by an ambitious housewife, Anita Roddick, whose husband was frequently out of town on business. Instead of watching the soap operas or taking aerobics classes, she began tinkering with potions in her garage. Her potions were so popular that she began to sell them in the neighborhood, and this backyard enterprise soon developed into a serious business that went public in 1984, for 5 pence (roughly 10 cents) a share.

From its modest beginning, the Body Shop was soon transformed into an international network of franchises devoted to applying fruits and salads to the skin. In spite of two big bobbles (the stock lost half its value in the Great Correction and again in the Saddam Sell-off), in six years the 5-pence issue had turned into 362 pence, more than a 70-fold return on investment for the lucky friends of the founders who bought in on the initial offering. The Body Shop trades
on the London Stock Exchange, but it can also be bought and sold through most U.S. brokers.