Editor's note: This weekend, we want to introduce Digest readers to Berna Barshay...
Berna earned a bachelor's degree from Princeton University before obtaining her MBA from Harvard Business School in 1997. From there, she spent more than two decades working in the hedge-fund world and at illustrious firms such as Swiss Re and Goldman Sachs.
Then, in April 2020, Berna decided to make a career change... She joined our good friend Whitney Tilson as the newest editor at our corporate affiliate Empire Financial Research.
Over the past year, Berna has thrived as the editor of the Empire Financial Daily e-letter. And she has played a key role in countless winners across Empire's various publications.
In today's Masters Series, Berna will explain how narrowing your focus can give you an advantage when looking for investment opportunities... detail the difference between qualitative and quantitative assessments (and why you should utilize both)... and discuss what attracts her to a sector that scares many investors away...
To Beat the Market, Pick a Lane
When it comes to investing, you'll do better knowing almost everything about a few areas than you will by knowing a little bit about everything...
That was an important takeaway from a Columbia Business School virtual investment conference that I attended earlier this year. One of the keynote speakers was legendary fund manager Bill Miller...
When asked for advice on how young investors might hone their skills, Miller suggested developing sector expertise – that is, getting really good at knowing one thing.
It's something I learned early on in my career, too...
When I started my first hedge fund – returning to Wall Street after a brief time away at a venture-backed startup – I found myself overwhelmed with choice. My prior job had been at a long-only fund where my universe was strictly defined by sector, market cap, and geography. Now, I could go long or short any equity in the world... of any size... in any sector.
I quickly realized I needed to narrow my focus...
To keep it manageable, I decided to focus on retail, apparel, and footwear, which had been my area of expertise at the long-only shop. I also concentrated on tech, media, and telecom ("TMT") because I was coming out of a tech startup, had briefly flirted with a job offer in Big Tech, and had friends working in those sectors to whom I could turn for insight.
I also allowed myself to look at one other sector that would rotate based on market opportunity. Over the years, that final sector in my toolkit included opportunistic forays into energy, basic materials, and health care services.
As the years went on and analysts and fund managers were encouraged to specialize, I narrowed my focus to just the consumer sector and the consumer-facing parts of TMT.
Many sectors tend to boom and bust with high correlation across companies...
For example, energy stocks tend to move in lockstep with oil and gas prices... and for the most part, the dominant players stay dominant. It's also rare to see one company earning twice the margin of a close peer, since they produce interchangeable commoditized goods.
But in both consumer and TMT, even when the overall revenue pie is shrinking, someone is growing. It's a market-share game... and market leadership turns over a lot.
When I started my first buy-side job in the late 1990s, the largest tech stocks were IBM (IBM) and HP (HPQ). Google's parent company, Alphabet (GOOGL), was a startup and wouldn't go public for another six years. Amazon (AMZN) was just a $10 billion midcap.
On the retail side, after Walmart (WMT), the three biggest retailers by market cap were Sears, Kmart, and JC Penney, which have all since gone bankrupt. The hottest specialty retailer at the time was Bebe Stores (BEBE), which never went bankrupt... but did close its doors for good in 2017 after years of decline.
Retail is a terrible sector. Even before the rise of e-commerce, formerly successful retail companies fell apart all the time. Why waste any energy in the space when I could just focus on TMT exclusively?
When you know a sector well, you can always find investment opportunities... That's especially true in a sector that deals with constant turnover in leadership (like retail).
I've always found success in the retail, apparel, and footwear sector because understanding these stocks requires good qualitative insights in addition to good quantitative judgment...
Companies that have a fashion element require understanding which consumer trends are emerging and which are fading... or which young brands are on their way to evergreen popularity and which will prove a flash in the pan.
Understanding trends and fashion requires qualitative judgment. It's not something that you can learn in a textbook.
But it doesn't matter if a company is making the most on-trend, beautiful products in the world... If it can't price them at a level that covers overhead plus manufacturing and selling costs, it will fail. If a company is growing like a weed with a hot product but doesn't have the balance sheet to support that growth, it will also fail.
Understanding products and trends isn't enough... Otherwise every junior employee at Vogue would jump ship to run a hedge fund on Wall Street. That's why you need the quantitative, nitty-gritty financial analysis, too.
You have to be "book smart" about the financial statements in consumer goods, just like in any other sector... But if you stop there, you'll fail. You have to try to imagine the world that's coming as opposed to the one you're currently living in if you want to find the top stocks in the consumer sector.
Just like investors often have to make a mental leap to believe a tech company will establish a market that doesn't exist today, the same often happens in smaller ways within the consumer sector... Billions have been made on products coming out of nowhere and becoming enduring staples of modern life – from Lululemon Athletica's (LULU) yoga pants to Deckers Outdoor's (DECK) UGG boots.
My introduction to the sector was a fluke...
The sector was assigned to me because someone I had never met had just quit his job. But I soon found that I had a leg up on my male peers because they all approached things the same way... by diving into the corporate filings and financial statements and focusing on the numbers – the same way you would with a bank or oil company.
As I said earlier, the numbers are indeed important when looking at retail companies. But they just don't tell the whole story...
There is a "je ne sais quoi" to figuring out which of these companies will win. It's something I have always had an instinct for... one, because I love fashion and retailing... and two, because it's much easier for women to figure out what women like than it is for men.
Many famous investors have admitted that fashion and apparel retail stocks confound them. The sector is full of fads, and it's hard to measure these companies' core and persistent earnings power.
One thing that can help with that is having industry contacts. I have many friends who work in retail. They often will tip me off to emerging trends and brands and help me determine what might be a bubble right before it pops.
The thing that scares many investors away – that companies in this business are so inherently unstable, both to the upside and the downside – is exactly what attracts me to the sector.
This constant changing of the guard in terms of leadership makes for a lot of volatility... and a lot of opportunity for investors who can spot these trends as they're taking off (or about to end).
Consider the "boring" old-economy business of shoes...
In theory, footwear shouldn't be a great place for investors to make money. People have worn shoes for thousands of years. It's not a revolutionary technology.
Styles shift over time. But as much as companies like Nike (NKE) try to convince consumers they're continuously innovating, their innovation doesn't hold a candle to the kind you see in areas like electronic vehicles or streaming video – two industries that didn't even exist when I started on Wall Street.
To make multibagger returns, you'd think you would need to go to a sector a whole lot sexier than shoes. But Steve Madden (SHOO) has been a 12-bagger since I first bought it in my fund in 2005...
Even Skechers U.S.A. (SKX) has been a nine-bagger since I first bought it in late 2004...
I've had other big wins in the footwear sector, too... I bought shares in Germany's Puma (PUM.DE) for around €10, and they're trading around €92 today.
I used my knowledge of the footwear industry to guide Empire Investment Report subscribers into Crocs (CROX) last summer...
The company had completed a successful turnaround, was coming off a banner year, and was quietly enjoying a surge in demand from people wanting to be comfortable at home during the pandemic. I knew the stock was too cheap and had multiple ways to win.
Sure enough, we closed out of the position for a 49% gain less than four months later.
The point is, if you know an industry well, you can almost always find a way to make money in it.
Regards,
Berna Barshay
Editor's note: Empire Financial Daily readers who followed Berna's advice over the past year could've made gains of 130% on online marketplace Fiverr (FVRR)... 266% on e-commerce clothing retailer Revolve (RVLV)... and even 341% on retailer L Brands (LB).
Now, she's joining Whitney for an event unlike anything they've ever hosted...
On Thursday, June 10, at 12 p.m. Eastern time, Berna and Whitney will reveal how a "hidden" corner of the market could give you the chance to earn a string of double- and triple-digit gains. They'll explain how you can accelerate your wealth and supercharge your portfolio... and discuss three stocks they believe every investor should buy immediately.
This event is free to attend. You only need to reserve your spot in advance right here.