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The S&P 500 ended 2011 almost exactly where it started.? If ever there was a year when being invested in the right companies, and selling the dogs, mattered for higher portfolio returns it was 2011.? The good news is that many of the 2011 dogs were easy to spot, and easy to sell before ruining your portfolio.
A theme to recognizing Dogs
There were many bad performers.? However, there was a common theme.? Most simply did not adjust to market shifts.? Environmental changes, from technology to regulations, made them less competitive thus producing declining returns as newer competitors benefitted.? Additionally, these companies chose ? often over the course of several years ? to eschew innovation and new product launches.? They chose to keep investing in efforts to defend and extend historical, but troubled, businesses rather than innovate toward a more successful future.
Looking at the trends that put these companies into trouble we can recognize the need to continue avoiding these companies, even though many analysts are starting to say they may be ?value stocks.? Instead we can invest in the trends by buying companies likely to grow and increase portfolio returns in 2012.
Avoid Kodak ? Buy Apple or Google
Few companies are as iconic as Eastman Kodak, inventor of amateur photography and creator of the star product in the hit 1973 Paul Simon song ?Kodachrome.? However, it was clear in the late 1980s that digital cameras were going to change photography.? Kodak itself was one of the primary inventors of the core technology, but licensed it to others in order to generate cash it invested trying to defend and extend photographic film and paper sales.? In my 2008 book ?Create Marketplace Disruption? I highlighted Kodak as a company so locked-in to film sales that it was unwilling to even consider moving into new markets.
In 2011 EK lost almost all its value, falling from $3.85 share to about 60 cents.? The whole company is now worth only $175M as it rapidly moves toward NYSE delisting and bankruptcy, and complete failure.? The trend that doomed EK has been 2 decades in the making, yet like an ocean freighter collision management simply let momentum kill the company.? The long slide has gone on for years, and will not reverse.? If you want to invest in photography your best plays are smart phone suppliers Apple, and Google for not only the Android software but the Chrome apps that are being used to photoshop images right inside browser windows.
Avoid Sears ? Buy Amazon
When hedge fund manager Ed Lampert took over KMart by buying their bonds in bankruptcy, then used that platform to buy Sears back in 2006 the Wall Street folks hailed him as a genius. ?Mad Money? Jim Cramer said ? Fast Eddie? Lampert was his former college roommate, and that was all he needed to recommend buying the stock.? On the strength of such spurrious recommendations, Sears Holdings initially did quite well.
However, I was quoted in The Chicago Tribune the day of the Sears acquisition announcement saying the merged company was doomed ? because the trends were clear.? Wal-Mart was in pitched battle with Target to ?own? the discount market which had crushed KMart.? Sears was pinched by them on the low end, and by better operators of vertically focused companies such as Kohl?s for clothing, Best Buy for appliances and Home Depot for repair and landscape tools.? Sears was swimming against the trends, and Ed Lampert had no plans to re-invent the company.? What lay ahead was cost-cutting and store closings which would kill both brands in a market already overly saturated with traditional brick-and-mortar retailers as long-term more sales moved on-line.
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