By Matt McCallSep 27, 2017
About 10 years ago, I knew someone who was a buyer for Nordstrom (JWN), and the stores started selling what I thought were pretty awful looking jeans. They were also made by a company with a strange name – True Religion. Well, it wasn’t long before I started to see everyone wearing them. So yes, I may have a lousy fashion sense (except for when it comes to socks), but as an investor, I knew I had to look into these thick-stitched, obnoxious jeans that everybody was shelling out $300 a pair for.
After learning more about the company, I discovered that these jeans were being sold in all kinds of stores and that other companies were getting in on the action, which is one of the signs of a trend. Moreover, there was another trend taking place in that women were wearing jeans everywhere, even to work. So were men. The fashion trend was real, and I started buying the stock around $1–$2 per share. I traded in and out a few times over the next several years, and made a lot of money on True Religion before it was bought out by a private equity firm in 2013.
The lesson here is that just noticing what’s going on around you can lead to great investing ideas, and that you don’t have to be some certified professional with letters after your name to do it. For example, the moment you started paying several dollars for a caramel latte instead of $0.50 for a drip coffee should have been a signal of a great investment opportunity in Starbucks (SBUX). Or when Under Armour (UAA), trading at $1.50 back in 2009, started appearing on every kid’s birthday wish list and became a back-to-school shopping must-have. A few years later, the stock was above $50, and a $15,000 investment would have been worth over half a million dollars.
This idea of investing in what you know was the hallmark of one of the most successful and famous investors of the last 50 years. If you’ve been in the stock market for a while, you’re probably familiar with Peter Lynch, who became known for his “invest in what you know” approach.
Lynch ran Fidelity’s Magellan fund for 13 years, and his compounded average annual return over that period was 29%. One of his more famous investments – one that earned his clients 900% – started with his wife. She brought home a sample of L’Eggs pantyhose when the product was being test-marketed. She talked about how great they were, and from there Lynch began his research. He discovered the potential for a quality product that was sold in drugstores instead of department stores, and he went on to get what he called a “ten bagger” in Hanes before it was sold.
I’m a fan of buying what you know, and I’ve had a lot of success with it through the years. It’s a key part of how I identify the NexGen mega-trends that provide the foundation for the best stocks within those trends to outperform. The key is to distinguish between a fad that will fizzle out – although you can still make money even in a fad, especially in short-term trading – and a trend that will continue to grow and generate wealth for years to come.
We talk about them all of the time in my newsletters and here in MoneyWire – everything from mobile to millennials to robotics to self-driving cars to people living on Mars. And that’s just a few.
The part I still can’t get over is how late to the party Wall Street is, because everyone there subscribes to a different interpretation of “buy what you know.” To them, it is buying the same old familiar stocks that everybody else owns. Those are the ones they know and will stick with, the winners of today. For me, I’m much more interested in the winners of tomorrow. That’s where the big money is.
Both in the United States and abroad, there’s been a clear trend of kids and millennials shifting their loyalty away from Nike (NKE) and toward Adidas (ADDYY). I’m neither a kid nor a millennial, but I’ve made the same shift myself.
I’ve been noticing this trend in the athletic apparel sector over the last year, and my most recent trip to Europe really motivated me to dive even deeper into what I was seeing. Adidas is everywhere in Europe, and I observed that its reach extends to all ages and walks of life. I even picked up another pair for myself in Scotland despite the fact that the currency exchange made it more expensive!
But those observations are just the beginning. From there, you need to start your research. That’s where my NexGen system goes beyond Lynch’s strategy, as we run every possible trend and investment through our strict criteria.
So here’s what I found out about the athletic apparel sector and the sneaker business in particular. Conditions have been rough for the basketball footwear sector. Sales are down 20% from 2016, and this will mark the second consecutive year of declining top lines. Nike’s sales are down mid-single digits, and the Jordan brand has lost one-third of its sales. Under Armour (UAA) has been hit even harder, as its foray into basketball sneakers is starting to look like a very costly failed experiment.
Adidas, however, is telling a very different story, and I definitely think we’re on to something. It has bucked the trend with a 40% rise in sales over last year. And here’s more: For the first time in over 10 years, Nike did not have the best-selling sneaker last year – that honor went to the Adidas Superstar. In August, Adidas passed Nike’s Jordan line to become the number two sneaker brand in the country as its market share improved by almost half to 13%. And consider this, Adidas’ market share was just 4% two years ago.
I looked at tons more data, and the numbers are proof that the trend my eyes spotted is real.
ADDYY has an impressive chart as well, which is the next set of criteria after the intangibles (trends) and fundamentals. The stock has gained more than 40% so far this year and recently hit another new all-time high – quite the opposite of both Nike and Under Armour.
Adidas is the latest example of an investment that came directly because of a trend I was watching. The stock knocked it out of the park as we put it through our strict criteria, and I recently recommended it in my new NexGen Profit Multiplier service. Making money in the stock market doesn’t have to be complicated. You may already have some stories of trends you’ve spotted. If not, keep your eyes open and I’ll bet you will soon.
Don't miss out on the incredible megatrends that are shaping today's market. Gain access to the most powerful market insights and stock advice from Matt McCall absolutely FREE. Join Today!