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Wall Street's Retail Idiocy

For me, nothing starts the day off like a good Internet chat with my Fool colleague Stephen Simpson. Given that we're both a bit gripey and loose-lipped, it's a good way to brush off the neurons and get things fired up. But this morning's discussion really angried up the blood.

We were looking at retail, the most schizophrenic segment of the market these days. Sales are good! Sales are bad! Consumers are flush with cash! Consumers are eating Friskies and stuffing their Benjamins and Jacksons into mattresses! What is it, man? Make up your minds! Does anyone out there know anything?

Whole lotta wrong
One bit of panic today: Wal-Mart (NYSE: WMT  ) , which is back in the soup as profit forecasts and sales projections land at the bottom of expectations. Only a few weeks ago, the headlines had Wal-Mart as the comeback story of the season, beating Target (NYSE: TGT  ) to the punch, etc. and so forth.

Want another big "surprise?" Look no further than American Eagle Outfitters (Nasdaq: AEOS  ) , whose stock has been all over the place lately as the market reacts to a neverending stream of analysts' pontifications about upcoming sales and earnings, or threats to same. Oy, were they off. Today's comps numbers out of American Eagle show December growth at almost 10%, trouncing the 3.5% expectations that our expert friends the "analysts" had predicted.

It's the same story at resurgent Guess? (NYSE: GES  ) , where comps for December came in at a very hearty 17.5%, or twice the old "consensus estimate." Even Wet Seal (Nasdaq: WTSLA  ) avoided the club, putting up 38.5% same-store sales growth, nearly doubling Street estimates.

On the bummer side, Ann Taylor's (NYSE: ANN  ) comps were a slim 1.5% increase, less than half of what the Wise expected. And Pacific Sunwear (Nasdaq: PSUN  ) also came in light of predictions. (Analysts hit the bull's-eye with their Target predictions, at least.)

The numbers game is only a game
I don't mean to be too hard on "the analysts." Honestly, I sure don't think I could make predictions any better than theirs. But that's just my point: No one can. Not the suits on CNBC, not Jim Cramer -- not even when he gets really LOUD -- not individual analysts nor headline writers. Not even the folks running the companies know what's going to happen month to month.

Yet "The Street" spills tankers full of real and digital ink every day for an entire month, making predictions that almost never come true. In retail, the only thing that should surprise you is that anyone is surprised by the surprises.

And there's your advantage. Because in the long run, a month or a quarter's sales mean zilch.

Foolish bottom line
Fools who want to make money in this space will do well to follow a few simple rules to try and identify the superior businesses in the space, and get them on the cheap. It's not as hard as it sounds.

Tune out the monthly panic reports. Take a look at the longer-term trends in individual companies. Identify businesses with good balance sheets and solid cash flows, or improving margins on solid sales, and then sit back and tap your foot until the hyperactive markets to give you your deals.

With jittery investors jumping out the windows every time the consumers take a month off from the mall, you never have too long to wait. And with retailers comprising four of the decade's 10 best stocks, it's well worth your time to pay attention.

For related Foolishness:

Seth isn't the only Fool who looks to spot bargains in retail. Co-founder Tom Gardner recently pegged a teen retailer for his pick inMotley Fool Stock Advisor, and Phillip Durell thinks he's onto a good turnaround in the making forMotley Fool Inside Value. Clicking either of those links will get you a free trial.

Seth Jayson loves the fickle world of retail investing, even though it also drives him nuts. At the time of publication, he had shares of American Eagle Outfitters, Pacific Sunwear, and Guess?. View his stock holdings and Fool profile here. Fool rules are here.

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