Sell Five Positions to Prepare for the New Year

Like many retailers, Michael Kors Holdings (KORS) is closing stores. Unlike most, the stock is surging.

There is good reason. The British company is finally getting back to its roots. After several years trying to appeal to the mass market, it is returning to the fat margin world of upscale brands.

I added the stock to the Pivotal Point portfolio in early October on the basis of a pivotal inflection point for the business and share price. At the time, shares were stronger on rumors of robust sales at Jimmy Choo. The design house, best known for its expensive handmade women’s shoes, was acquired by Michael Kors in July. It was supposed to be a key part of turning the brand around.

When the company reported financial results November 6, the rumors proved true.

Chief executive John Idol told analysts the Jimmy Choo business is projected to reach $1 billion in sales. The stock surged 12.9% to a new 52-week high at $55.01.

The other part of the story was store closures. Shuttered stores have become common in retail, but axing fifty stores was a significant uptick to previous estimates. Idol said biting the bullet on failing stores sooner would allow the company to curtail discounting and promotions.

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That is an important point. A number of brands are doing very well at the high end of the retail spectrum. Michael Kors wants to play there, too.

Income inequality in the United States is much more pronounced than people believe. Scientific American reports globalization and technological change have caused a greater divide between skilled and unskilled workers. And the haves are getting an increasingly bigger piece of the economic pie.

The evidence is especially stark in retail. Malls with an Apple store are upscale, and they are thriving. Others, anchored by Macy’s (MA)Sears (SHLD) and J.C. Penney (JCP) are languishing. Going upscale is proving to be a very effective business model.

The secret is margins.

Michael Kors was able to increase gross profit is the fiscal second quarter by 100 basis points, to 60.2%. Income rose 50%, to 19.2%. Curtailing promotions increases profitability. If the company can continue to close weak stores, and open up a few more high-end Jimmy Choo locations, the way forward seems clear.

The stock has been on a roll since October. It’s now sitting at $61, having reached another 52-week high last week.

While the stock has performed well for the portfolio, it is not extremely expensive. Idol recently offered full-year earnings guidance in the range of $3.85 to $3.95. This is a beauty. Keep holding.

Now let’s pare back the portfolio to capture some big gains and accept some small losses as we prepare for the new year.

1. Cancel your stop loss and Sell Tyson Foods (TSN) at market, which is up 26.8% over the past 99 days.

2. Sell New Residential Investments (NRZ), up 7.2% over 65 days.

3. Sell Fidelity National (FIS) at the market, up 1.2% over 36 days.

4. Sell Cummins (CMI) at the market, which is down 2.1% over 37 days.

5. Sell Third Point Reinsurance (TPRE), down 3% over 29 days.

Hold the cash after exiting the positions.

As a result, we’ll be heading into the end of December with Michael Kors, +29%; NorthropGrumman (NOC), +19.8%; Danaher (DHR), +10%; and Reinsurance Group (RGA), +13.7%.

Thanks for reading, and see you again soon.

Best wishes,

Jon Markman