On the last day of 2020, I reviewed what had been my best and worst picks of the year... For the curious, last year's best call outs were home fitness company Peloton (PTON, up 220%), retailer L Brands (then trading under the ticker LB, up 148%) â which has since split into two companies â [â¦] Not rendering correctly? View this e-mail as a web page [here](.
[Empire Financial Daily] My Best and Worst Picks of 2021, a Surprising Takeaway, and an Update on Foot Locker By Berna Barshay On the last day of 2020, I reviewed what had been [my best and worst picks of the year](... For the curious, last year's best call outs were home fitness company Peloton (PTON, up 220%), retailer L Brands (then trading under the ticker LB, up 148%) – which has since split into two companies – Bath and Body Works (BBWI) and Victoria's Secret (VSCO), and trendy fashion e-commerce player Revolve (RVLV, up 132%). L Brands was also the fifth-best performing stock in the S&P 500 Index last year. I thought I would repeat this exercise since readers appreciated the accountability last year. Note that I am using December 20 closing prices to determine all year-to-date returns. At the top of the list of winners sits tech giant Alphabet (GOOGL), up 59% since my [first positive mention of it this year on January 19](. Alphabet had been a favorite of mine since [July 20, 2020, when I named it my favorite FAANG stock at the time]( – a position it would hold for almost a year. Since that first 2020 mention, GOOGL shares are up 81%. The Google search business is one of the best businesses in the world, and YouTube isn't too shabby either. Plus there are tons of call options in its less mature businesses – from Google Cloud to Waymo. All this... and a multiple that isn't much higher than the market's. Alphabet is the perfect example of growth at a reasonable price. In the No. 2 spot is the same stock that came in second last year: L Brands, which [I first mentioned this year on February 26]( when shares traded hands just under $55. LB shares stopped trading in August, but you can reconstruct what the LB price would be today by adding one-third of the price of a share of Victoria's Secret to the price of a Bath & Body Works share... This gets you to a theoretical price of $84.25 for L Brands, up 54% since that February piece. Of course my first mention of L Brands was in the [May 22, 2020 Empire Financial Daily]( when LB shares traded just over $15. Since then, shares are up 459%. Having covered this company for two decades, I was able to see value where many others couldn't... as well as identify early signs of a dramatic turnaround at Victoria's Secret. Rounding out the top three is spirits giant Diageo (DEO), which is up which is up 28% from [my first mention of it this year on February 2](. I had first written about Diageo in the [September 10, 2020 Empire Financial Daily](. Since then, shares are up 58%. Diageo has great brands, an impressive global presence, and the closure of bars and restaurants around the world in 2020 put its shares on sale temporarily. It's another version of growth at a reasonable price, albeit lower growth than Alphabet. You may notice a pattern here... These are all stocks I picked in 2020 and I stuck with them. If you know you have a winner... stick with it! That's why Alphabet is a core holding in both our Empire Stock Investor and Empire Investment Report paid newsletters, and why Diageo has been sitting in Empire Stock Investor as a recommendation for over a year. More room to run is why I didn't hesitate to recommend LB shares to subscribers of my Empire Market Insider newsletter in July, even though the stock was already up 407% since that very first mention in Empire Financial Daily. It's exactly the type of misunderstood, underappreciated, high-return potential stock I want to recommend in that service and normally would save for premium subscribers... but since I didn't have a paid service yet in 2020, Empire Financial Daily readers got one of the best ideas of my career as a freebie. But L Brands wasn't the only name to make a repeat appearance... My truly best ideas this year weren't actually stocks I said were great buys... they were the stocks I told readers to avoid or sell if you own them. If I was still at a hedge fund, these would have been the stocks I shorted. But since Empire Financial Daily aims to be friendly to new and less-experienced investors, I don't explicitly recommend shorts. But when I tell you to avoid something, stay away, or sell/trim... clearly, I think it is going down! If you include these thinly veiled short calls – or calls to avoid – last year's No. 1 stock actually becomes this year's No. 1 stock too... but betting the other way. In a bit of timing that I fully admit was as much lucky as smart, I just missed top-ticking PTON shares [on January 22 when I said they were fully valued and due for a pullback from the $160 level they traded at back then](. That was just a hair off their all-time high of $167, made eight days earlier. Since I went negative on Peloton on January 22, PTON shares are down 76%. I wrote a ton about Peloton in the past two weeks, which you can catch [here]( and [here](. Suffice to say, I think it may go down more. My second-best pick of the year was actually [the call to sell shares of media company ViacomCBS (VIAC) on March 15](. I had no idea of the storm brewing with the leverage and subsequent illiquidity of Bill Hwang's Archegos Capital... but unknown to me, his endless buying of VIAC shares was a big reason they had risen from $30 to nearly $100 at the time of my essay. Like L Brands, I had covered ViacomCBS for decades and knew something didn't add up, given the company's weak positioning in the streaming space. While this is the No. 2 in terms of the numbers – it's down 70% since I said to sell – in a way this was my best pick, because within just two weeks, the shares were cut in half. Again... luck played a role. I was smart enough to know something was off... but the speed at which it played out was luck. Rounding out the top three was sketchy special purpose acquisition company ("SPAC") Andina Acquisition, which now post-merger is known as [Stryve Foods (SNAX)](. Shares change hands around $4, down 65%. I identified some other loser SPACs this year, including [VG Acquisition]( which bought genetic testing company 23andMe (ME). Since my February 8 takedown of 23andMe, shares are down 57%. I also expressed bearishness on [the SPAC buying WeWork (WE)]( in the April 20 Empire Financial Daily. WE shares are down a less dramatic 30% since then... but they are still losers so far. My biggest mistakes centered around companies that I also have followed for decades... I've been on the wrong side of Apple (AAPL) shares all year. I said it was time to trim or exit in the [May 11 Empire Financial Daily]( because I thought there were better opportunities out there. I repeated that view several times. I was wrong... AAPL shares are up 35% since that first 2021 mention. I'm not sure anything happened that was so different than what I expected fundamentally, but the stock took me by surprise. For the second year in a row, I got media giant Disney (DIS) wrong. Coming into second-quarter earnings, [I stuck with Disney and said I would stay on the sidelines with rival Netflix (NFLX)](. Since then, DIS shares are down 20% and NFLX shares are up 10%. Bad call by me... Sometimes you can know tons about companies but still get the sentiment wrong. My third-worst pick was Alaska Airlines (ALK), when I called it the best of the bunch (of airlines) in the [March 30 Empire Financial Daily](. Since then, it has been a dog... down 29%. Of course in the same piece, I said to avoid American Airlines (AAL, down 28%), United Airlines (UAL, down 29%), Delta Air Lines (DAL, down 26%), and cruise ship operator Carnival (CCL, down 29%). 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--------------------------------------------------------------- My takeaway from this exercise is that the death of shorting has been highly exaggerated... I frankly had a much better year picking shorts than longs. There were a few themes... the aforementioned low-quality SPACs, which had the tailwind of the whole group going down more than 20%. Another theme was low quality and/or overpriced initial public offerings ("IPOs"). Some of the picks here were stock trading app [Robinhood (HOOD, down 52%)]( [fashion rental site Rent the Runway (RENT, down 51%)]( and[salad chain Sweetgreen (SG, down 39%)](. Other stocks that I have been harping negative on since 2020 had moments of reckoning in 2021... There's [highly indebted telecom giant AT&T (T)]( which I have been writing negatively about since June 2020... it's down 20% as the folly of its terrible capital allocation has come to light, most recently in its stunning about face as [it dumps the Time Warner media assets]( it fought so hard to acquire. In December last year, [I argued that Stitch Fix (SFIX) was dressing up business challenges as new business opportunities](... and I expressed skepticism that the new business initiatives would work. Well, they haven't so far, and SFIX shares are down 73%. I've been like a broken record about the challengers to the Uber (UBER) business model... wondering if the company will ever make money in the hyper-competitive worlds of ride hailing and food delivery. UBER shares are down 30% [since I first expressed skepticism this year](... although to keep it honest, the shares are up 29% [since I first said to avoid them in August 2020](. The bottom line is I was much better picking shorts in 2021 than picking longs... Picking shorts has always been a strength for me... but frankly these results surprised me. Take a look...
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 All in all, the stocks I've warned Empire Financial Daily readers to avoid have fallen 25% this year, while the S&P 500 is up 7% over the comparable period as the picks. This is not what I would expect, with the S&P 500 up 24% this year and all the fireworks we saw with short squeezes early in the year. There are two explanations... - I really avoided writing or making calls on meme stocks, save movie theater chain AMC Entertainment (AMC). When I addressed the others, I wrote about the businesses but not the stocks. That allowed me to avoid some landmines.
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- The concentration of returns in the market has been intense this year. Just five tech stocks – Microsoft (MSFT), Apple, Nvidia (NVDA), Tesla (TSLA), and Alphabet – account for over one-third of S&P 500 returns this year. According to analysis from Goldman Sachs (GS), since April, 51% of S&P 500 returns are from just these five stocks. Take them out, and the market is only up around 16%... so it's a lot easier to imagine finding stocks that go down. Speaking of long picks, I've had a few requests for an update on athletic footwear and apparel retailer Foot Locker (FL)... [I first expressed my enthusiasm for FL shares in the October 18 Empire Financial Daily]( then they had a nice little move up and [I declared them a "screaming bargain" on November 3](. But cheap got cheaper... FL shares are down 23% since that second mention, and the price to earnings ("P/E") ratio on them has contracted to 6 times from 7 times. Some of this can be explained by the sluggish performance of small-cap stocks since the beginning of November as well as the general sell-off in retailers. While FL shares are lagging both the Russell 2000 Index and the SPDR S&P Retail Fund (XRT) since November 3, all three have had a rough go of it lately...
 I'm disappointed in the short-term performance of Foot Locker, but my long-term thesis is unchanged. In a world in which athletic giants Nike (NKE) and Adidas (ADS.DE) are pulling back distribution and cutting off small and midsize retailers, Foot Locker will be able to take share... and I don't see Nike ever cutting off Foot Locker. I was waiting for Nike to report this week before updating on Foot Locker. I found Nike's comments on Monday night very constructive for Foot Locker, which may be why FL shares bounced 4% yesterday. My friend and former colleague John Zolidis, who runs a registered investment advisor ("RIA") called Quo Vadis Capital, summed it up really well, so I will let him explain what Nike's comments meant for Foot Locker... We believe there has been a paradigm shift in growth strategies for vendors, misunderstood by investors, that has followed Nike's lead. Historically, vendors (such as Nike, Under Armour, Yeti) grew by adding distribution. This meant adding accounts, and doors within accounts, and then taking incremental shelf space within existing doors. Brands attempted to match growth in distribution to demand, with the goal to avoid becoming "over-distributed", which would lead to reduced sell-through, increases in markdowns and lower realized gross margins across channels. In the post-disintermediation-era, established brands are no longer seeking to grow by adding doors. Rather, the new objective is to grow by maximizing gross profit dollars across channels. This certainly preferences the brands' own channels, but it is also accruing benefit to wholesale partners by reducing competition as accounts are reduced, sell-throughs thereby improved, and markdowns moderated. This is a permanent change that benefits key retailers, in our opinion. John calculates that at its current P/E ratio of 6 times, FL shares are trading at a 41% discount to their historical average. Some investors clearly think earnings are going to crash... But Nike's North American sales to wholesale accounts were down just 1% in the most recent quarter, while Nike sold to 50% fewer wholesale accounts than four years ago. A flattish business split fewer ways means more pie left for those who remain, which includes Foot Locker. I'm sticking with FL shares as one of my top picks for 2022. I would have recommended them in my premium newsletter Empire Market Insider... but I had already recommended a company in the same space that I think has a bit higher of a return potential, and I didn't want to double down on the same bet. But I think both stocks will be big winners in 2022. If you want to learn more about Empire Market Insider and find out how you can access this other related idea, [click here](. In the mailbag, a question about Foot Locker! What were your best and worst picks this year? Did you own any of the five stocks that drove so much of index returns this year? Did anyone try shorting this year... and how did it work out for you? Any big winners? Share your stories in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Hi Berna, I emailed you this question twice over the past several weeks but haven't received a response. Hopefully, the third time is a charm! "You called Foot Locker a 'screaming buy' in November but the stock has dropped more than 20% since then. What event(s) do you believe will trigger the stock to reflect your optimism?" – Frank S. Berna comment: Frank, sorry I kept you waiting... I was waiting for Nike! I hopefully addressed your question sufficiently above... But in terms of specific catalysts, the main one would be earnings not collapsing in 2022, because that is what the stock price is reflecting now. If shares linger down here, you could see buybacks accelerate and become a catalyst. Finally, while I am a little bearish on the market for consumer sector IPOs right now, Foot Locker does have a nice hidden asset with its stake in GOAT, a fast-growing online resale marketplace for athletic goods. At some point, that could go public... or maybe just get acquired by a strategic investor. Regards, Berna Barshay
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