Scott Fearon, CFA, is founder and president of the hedge fund Crown Capital Management. He is also the author of Dead Companies Walking: How a Hedge Fund Manager Finds Value in Unexpected Places, which chronicles his 30 years of experience in the investment management industry. Fearon holds a BA from Stanford University and an MBA from the Kellogg School of Management at Northwestern University.
Many retailers enjoyed a robust holiday season. Investors looking to capitalize on these glad tidings might be tempted to consider some of the bargain stocks in the sector, especially those that have faltered in recent years, such as JC Penney (JCP) and Sears (SHLD), or even deeply troubled firms, such as RadioShack (RSH) and Wet Seal (WTSL). Not to play the Grinch, but history suggests this would be a terrible idea.
Investors need to peel their eyes away from a stock’s numbers long enough to ask a very basic question: “Will this company or industry still exist in five years?” It happened in the case of pay phone operators, paging companies, and video rental chains — and it’s almost certainly happening right now in a number of companies and sectors.