Wall Street's Leaders and Laggards

Overnight, we became glued to Bloomberg, CNBC and the Wall Street Journal. Financial news was more riveting than CSI, Law & Order and NCIS.

Wild gyrations gripped the markets, and retailers were caught in the whirlwind. One thing quickly became clear as we suddenly became devotees of the financial media: prior to the meltdown market opportunities were viewed through rose-tinted glasses, resulting in widespread over valuation. Post-meltdown, everything became suspicious, resulting in widespread under valuation.

True value was somewhere in the middle, but difficult to find. What you needed was information that considered a longer-term view of business fundamentals combined with sharply defined competitive analysis.

What you needed was the kind of information aggregated and analyzed by wRatings, a stock research firm headed by founder and CEO Gary Williams. Williams is a member of the RIS Financial Advisory Board and the primary research partner for this story, which provides an exclusive look at data usually reserved for investment fund managers and other large investors.

The data has been crunched to identify top 10 lists based on year-over-year retail performance, in both leader and laggard categories. We decided to do this analysis right after the holiday selling season, which was a gut check of epic proportions for most retailers.

Behind the Curtain

Buffet, like Williams, tracks long-term performance trends and looks for what he calls "moats," based on the concept of protective trenches filled with water that surrounds castles. In business, moats are obstacles that keep out competitors and hold customers captive, or at least make it difficult for unwanted entry or exit.

A good example of a moat is eBay's lock on user-controlled auction sales. Another is Starbucks rabidly loyal customer base. Williams analyzes moats in nine areas, comprised of three each in supply chain, products and customers.

Williams has tracked more than 540 companies for more than 10 years, and to this data he applies a unique formula that combines five years worth of financial metrics with how well companies are meeting customer expectations. This creates a numerical figure that Williams calls a wScore. The rating also takes into account scores for all companies tracked, so each one is relative to all other companies across industry verticals.

Among the companies Williams tracks are small cap and large cap North American retailers. Here is what the research has to say about current winners and losers in retailing.

Our three sensible neighbors to the north favor strategies based on sound business fundamentals and steady performance over rapid growth and greater exposure to risk. This approach is paying off now in troubled times.

Both Aeropostale and The Buckle appear on the leader's chart after posting stellar sales and profit figures throughout the Great Recession. Counter intuitively, both are in the apparel segment, one of the hardest hit in retailing.

Even as their competitors suffered, these two companies thrived, which confirms the point that focusing on fundamentals and moats is the best approach to delivering market-beating performance under difficult conditions.

One of the big winners during the current economic crisis is the dollar discount category. Both Dollar Tree and Family Dollar have been able to successfully rack up consistent gains during a time well suited to their pricing model.

Ross Stores is interesting because it seemingly defied gravity, producing strong results in the hard-hit department store category. It's "dress for less" position in the market resonates with customers trading down for cheap chic.

A few of the retailers that nearly made the leaders list include Bed, Bath & Beyond, Walmart, Pacific Sunwear, American Eagle Outfitters, Cabela's, Kohl's and Big Lots.

On the laggards list, which is composed of retailers with the lowest wRating in 2010, furniture companies are well represented, thanks to the generally poor performance of the home improvement category.

Bassett Furniture, Pier 1 Imports and Furniture Brands International are near the bottom despite having stock prices that actually shot up in 2009.

The reason so many laggards have what appear to be outstanding stock gains in 2009 is that the crash occurred in late 2008 and early 2009. Therefore what looks like a sizable gain is really just a reflection of how low the stock had sunk before the market began to stabilize To be as up-to-date as possible, year-over-year stock prices reflect prices on January 23, 2009 and January 22, 2010.

Zale suffered last year like others in the battered luxury category, and recently removed its senior management team. Blockbuster is attempting business transformation as fast as it can due to the gradual disappearance of DVDs in favor of downloading or streaming delivery models.

Year-Over-Year Leaders and Laggards

Dominating the year-over-year negative performance list are furniture and home goods retailers, such as Basset Furniture, Furniture Brands International, and Williams-Sonoma.

Also making this list is Borders, which like Blockbuster is coping with the gradual disappearance of its core business. The remainder of the list is made up of apparel retailers that have not been able to successfully adjust to recent shifts in consumer demand and pricing.

The year-over-year stock price leaders list (and the laggard's list, too) reflects something we are not likely to see again. At least we hope not. It is dominated by retailers making hundreds and even thousands of percent gains in share price. This is not a reflection of performance value, but instead demonstrates how low prices had fallen after the crash, one of the sharpest drops in generations.

Looking at these gains, don't you wish you had the courage to plunge your life savings into these companies on January 23, 2009 and sold them on January 22, 2010?

Looking ahead to 2010 and beyond, Williams believes smart retailers need to shift from focusing on "safety" when purchasing to "precision" in pinpointing consumer wants and needs.

"Smart retailers will figure out how to control two parts of their business better than anyone else," says Williams. "The customer experience and their ecosystem. 

A successful retailer focuses on what it can uniquely provide to its customer (an in-store experience like a fashion show) and then ensures its suppliers (ecosystem) share in the benefits/revenues. 

Research for these charts was produced by wRatings, which provides exclusive analysis of corporate performance insight to fund managers and large investors. For more information visit www.wratings.com