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I have a pretty embarrassing confession to make. My top two active CAPS picks are stocks I never actually bought. If I had, in early 2009, I would have beaten the S&P 500 by 200% and 100% respectively. I mentioned my top pick, Dorman Products (Nasdaq: DORM ) a few months ago, concluding that I still liked the company and thought its shares might still be a good value, even after a 200% run-up. The same can't be said for my second pick, Armstrong World Industries (NYSE: AWI ) , though.
I made both picks on essentially the same thesis. I thought Dorman would perform well in a shaky economy, as more people would put off buying new cars and instead keep their current ones running with after-market replacement parts. Over the two years leading up to the financial collapse, a time of much frivolity and spending, Dorman grew sales 16%. In the two years since, sales have grown 33%, confirming my thesis.
Likewise, I picked Armstrong on the theory that homeowners, unable to sell their current homes in a terrible housing market, would be more likely to alter or improve them, hoping to make them more attractive to buyers or to just get a change of flooring in lieu of a change of scenery. It would seem that I wasn't the only one with this thesis. One key metric has doubled with the stock price: Armstrong's P/E ratio, rose from a reasonable 15 to a much higher multiple of 23, which is actually a figure that's "adjusted" for currency effects and certain expenses. On a GAAP basis, Armstrong trades for nearly 82 times earnings.
The problem is, Armstrong gets a healthy portion of its sales from commercial buildings, and even in residential buildings, new houses account for a good chunk of sales. New home buying goes against my thesis, and offices can be expected to generally make do with what they have in hard times, not upgrade flooring to satisfy a desire for change.
A better bet would have been Lumber Liquidators (NYSE: LL ) , whose customer base is 90% current homeowners. Lumber Liquidators also benefits from the same deep-discount business model that has been doing so well for other retailers, like Dollar Tree (Nasdaq: DLTR ) , offering cash-strapped customers an enticing value proposition in difficult times.
I'm ending my Armstrong pick today and changing it to Lumber Liquidators. If I'd had real money in this, I'd be happy to sell one overpriced non-performer for one ideally suited to thrive.
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