Tripling the S&P Never Goes Out of Style

   I'm a 32-year-old father of one. My fashion sense begins with Lands' End jeans and ends with black Gold Toe socks. I can wear the same suit and shoes to work and to dinner that I wore to get married, and they'll do just fine for a funeral, too -- my own or anyone else's.

   If you're looking for fashion advice, I'm unquestionably the absolute wrong guy. But if you're looking for a successful value play, I've got a stylish little number you might want to try on for size. Shares of this company are poised to achieve standout triple-digit gains.

   Five catalysts will propel these shares going forward. A catalyst, in this context, connotes the same meaning as it does in chemistry. It's something that speeds up a reaction. But we're not talking about the mixing of two chemical compounds, we're talking about the market's valuation of these shares.

   A catalyst can be a new product, a merger or some macroeconomic shift that the company is poised to take advantage of. Catalysts can take many forms, but the result is always the same: The price chart reflects a dramatically accelerated upward price trend that shows a geometric rather than arithmetic rate of growth. The best part: Each of these five catalysts is exclusive to this apparel company. None of its competitors will be able to ride its coat tails.

   So what's the name of this outfit? It's none other than Liz Claiborne (NYSE: LIZ, $2.89).

   Now, even I am sufficiently conversant in haute couture to know that Liz Claiborne's separates are a long way from the runway excess of Karl Lagerfeld or the flawless elegance of Vera Wang eveningwear. Liz Claiborne is no longer the cutting edge of fashion or an arbiter of style, but it's still a serious player in the industry, one that rings up some $5 billion in annual sales.

   Indeed, the company's storied past has always encompassed as many business accomplishments as it has fashion milestones. Liz Claiborne, who launched her label in 1976, single-handedly changed the way department stores purchase and sell clothing. She pioneered outsourcing and proved she could deliver high quality at relatively low cost.

   Along the way, Claiborne's iconic clothing line, priced within reach for working women, became a staple of professional attire and have since inspired hundreds of imitators.

   Along both lines the results were undeniable. The Liz Claiborne brand became a billion-dollar trademark and a household name. Sales followed suit, if you will: The company's first year saw $2 million in revenue. That ballooned into $1.2 billon ten years later, when the company became the first founded by a woman to be included on the Fortune 500.

   That was then. The company now sports a diverse stable of major and minor brands that include the legacy Liz Claiborne line -- now being designed by one of the fashion world's brightest stars -- as well as some of the hottest new brands in women's apparel.

   Shares are down a shocking -85.2% for the year. What the heck happened? And what on earth is going to bring them back?

   Liz Claiborne shares faced some pressure after an earnings miss in 2007 that stemmed from a nearly $500 million non-cash charge to write down the value of some brands. It was a transitional year, with a new CEO at the helm, one who wasted little time in a launching a top-to-bottom review and a massive restructuring. Things reached what looked to be their ebb in July and began to turn around. In September, in fact, shares were nearly even for the year.

  There's no question than 2008 is going to be a better year for the company. It's certainly going to be in the black, though shares are still languishing along with their peers. Most experts foresee a continued pullback in consumer spending for the first half of 2009 -- though such a prolonged trend would be unique since the data has been tracked. But as the clouds lift on the economy -- not only here but around the world -- Liz Claiborne will be among the standout performers in the retail space.

   Claiborne has five high-octane catalysts that its competitors lack. These catalysts present significant competitive advantages that will help advance the company well ahead of the pack, faster and sooner than its peers.

   Here are the five catalysts that are going to turbocharge LIZ shares:

Catalyst No. 1: Isaac Mizrahi
   Isaac Mizrahi has influenced fashion for nearly two decades. His runway fashions for women are available at New York's tony Bergdorf Goodman, while a more affordable line of his fashions have been available at Target. But in William McComb's first major coup as CEO, he lured the flamboyant designer to oversee -- and, ostensibly, to update -- the venerable Liz Claiborne line.

   A connection with a proven, internationally recognized design star like Mizrahi is something that competitors like Chico's, Ann Taylor and Talbot's utterly lack. Mizrahi is a bona fide A-lister who will bring a new energy to the brand, which should re-excite many longtime customers as well as bring in a new wave of younger consumers.

   In a 2006 interview, Mizrahi noted that Claiborne was "not fashionable, it's nice." Mizrahi is not going to design anyone's mother's Liz Claiborne. I noted earlier that Liz Claiborne wasn't the cutting edge of design. Under a talent like Mizrahi, that could change.

   McComb played the Mizrahi hire for all it was worth. Claiborne had committed a major fashion faux pas by creating a lower-priced line for J.C. Penney. Macy's -- the dominant department-store player and Claiborne's biggest customer -- was fit to be tied over the move. It punished Claiborne by withholding orders, and Claiborne's net fell -65%. It was like Tyson Foods losing the Wal-Mart account.

   When Mizrahi came aboard, McComb made sure that Mizrahi's designs would not be sold to lower-priced stores like Penney and Kohl's. This cagey move both restored the Macy's relationship and added some exclusivity to the brand.

Catalyst No. 2: Lucky Brand Jeans, Juicy Couture and Kate Spade
   Today's hip teens and ubercool twentysomethings probably have no idea that their high-fashion jeans, preppy handbags and $250 velour tracksuits are the products of Liz Claiborne.

   McComb is half the catalyst, because he knows the power of these strong brands. The CEO cut his teeth at Johnson & Johnson, where he helped established brands like Tylenol and Motrin gain additional ground. And his entire restructuring has been all about decentralizing the corporate mothership mentality and unleashing each brand's unique creative mojo. (To wit: Juicy Couture is offering limited-edition Barbie dolls dressed as the brand's founders for $150.)

   Properly harnessed, those three brands can take Liz Claiborne to new heights. Seven for all Mankind ushered in the ultra-premium denim phenomenon in 2000; Claiborne had bought Lucky Brand Jeans in 1999 and has since ridden the trend.

    Seven now rakes in some $15 billion a year with jeans at the $170 to $300 price point. Lucky is priced just under that, at about $120. This puts Lucky just into the coveted "aspirational" brand segment, a notch above popular premium alternative brands like J Crew or Abercrombie & Fitch. But here is the difference: Young shoppers flock to Abercrombie and J Crew to shop for clothes. Kate Spade, Lucky and Juicy are destination stores where people shop for style.

   These three brands have a combined retail footprint of 706,400 square-feet and generate some $400 million a year in revenue. McComb has thrown underperforming or underpositioned brands overboard. Now he's focusing on these three, and their results will go a long way to bolstering the bottom line.

Catalyst No. 3: Diversity, Diversity, Diversity
   "The Domain" is a pedestrian-friendly outdoor shopping area in Austin, Texas, that's home to several dozen retailers, bookended by a Macy's and a Neiman-Marcus. The Mall at Short Hills in New Jersey is a massive indoor temple of retailing that combines most of the nation's major department stores with all of the major Fifth Avenue names.

   These two shopping areas are typical of the two breeds of retail centers in the United States. I've spent hours at each, and I can tell you that it is simply not possible to shop for women's apparel in either place without coming into contact with Liz Claiborne brands.

   Now, that could be said about national stores like Ann Taylor or Talbot's, too, but only if you were to venture into a Talbot's or Ann Taylor store. Claiborne's presence is far more pervasive. It doesn't have to contend with any distribution restrictions. Claiborne's wares are found on department-store racks in places like Dillard's and Macy's and down-market at outlets like Penney and Kohl's -- as well as in its own specialty stores.

   Not only are Claiborne's brands found in a variety of places, but they have a powerful edge against their competitors because they also span all age groups and lifestyles.

   Some shoppers might be content with department stores. Younger buyers are more likely to flock to Lucky Brand Jeans Stores, which look like oversized hippie closets and feature blaring music and peace signs on the walls. Juicy Couture's clothes -- with their proprietary colors and soft textures -- are displayed like art in a boutique setting that draws a wide cross-section of shoppers.

   Liz Claiborne reaches all ages and tastes at all price points in all kinds of settings that encompass every conceivable shopping preference, including outlet malls and a significant online presence. When the economy turns around, Liz Claiborne, more than any other retailer, is positioned to profit from each demographic segment's pent-up demand for fashion.

Catalyst No. 4: A Return to Profitability (and a Right-Sizing of Retail Valuations)
   Claiborne is likely to earn $1.05 a share in 2008. That means the shares are currently trading at slightly less than three times earnings.

   Listen, utilities are worth more than that! And no power customer ever said, "You know, that Xcel stuff is pretty good, but I'd really prefer some of ConEd's juice." But certainly buyers of women's apparel are going to choose based on factors like style, and Liz Claiborne certainly has the edge there, with a hotshot designer handling its flagship line and some of the hippest names in the business creating the collections at some of the nation's hottest destination retailers.

   In the past, LIZ shares have been valued at 10 times earnings on the low end and 15 times earnings on the higher end. At 12 times earnings -- squarely in the middle -- these shares are worth $12.60 today. Right now they can be had for about $2.89. I foresee a bumpy ride as the retail sector struggles, but if earnings can grow 25% to 1.38 in 2009, I think these shares have a fair value of $20, or roughly more than +450% above their current levels.

The Importance of a Clear Catalyst
   Women's apparel is one of the toughest businesses on earth, and Liz Claiborne is a fashion-industry leader with a compelling stable of fashion names and a CEO with a track record of helping established brands gain even greater traction. McComb's restructuring is right on, his hire of Mizrahi was just what the doctor ordered and he's on track to return the company to profitability and position it for some real broken-field running. LIZ shares have given such a performance before: Under former CEO Paul Charron, they rose roughly +430% from 1995 until his departure a decade or so later. This time, given these strong catalysts, that kind of result isn't going to take nearly as long.

   I think Liz is a winner. As a point of disclosure, I hold these shares. But I'd like to make sure that you take away something from this article that could be far more important to your success as a long-term investor, and that is the necessity of a clear catalyst.

   This nation is full of good companies. Honeywell, for example, is a good company. Weyerhaeuser is another. But the good is always the enemy of the great. To be a truly great company, you must have at least one knock-'em-dead catalyst. The fact is, you can't really go wrong long-term with shares of good companies like WD-40, Clorox or Chubb. They will make you money. But companies with strong catalysts will make you rich.

Two Top Rated Stocks -- Each With a Five-Star Catalyst Rating
   Our StreetAuthority premium newsletter, Market Advisor, uses a proprietary catalyst ranking system to identify the very best investments. This exclusive methodology has a strong track record: Since May 2003, the "good" companies that make up the S&P 500 Index have returned +44.2%. But the "great" companies with catalysts working in their favor have returned +136.9%. When it comes to your money, great is three times as nice as good.

   To illustrate the point, I'd like to tell you about two more companies. Each of these companies has earned the highest possible score (five-stars) in our catalyst ranking system. One is a major power producer in China, the other is one of the world's leading container shipping firms.

   To learn about the catalysts that are going to fuel these two companies, and how we used our proprietary system to triple the S&P 500 then read our report here.

   Many happy returns!

-- Andy Obermueller
Staff Writer
StreetAuthority Investor Update

 

Worth Noting

Just when U.S. companies are about to report their biggest write-down's, the losses may be the strongest signal yet that it?s time to buy stocks. Companies in the S&P 500 Index are marking down assets at the fastest rate in six years, leaving operating profits 46 percent higher than net income in the third quarter, a level last seen in 2003 when the previous bull market began.

-- Bloomberg

The stock market's "fear gauge" closed below 60 on Friday, the first time since September it traded below that level for an entire week. Strategists and traders say the gauge has flattened only because the market has mellowed a bit and likely isn't predictive of a rebound in stocks.

The Chicago Board Options Exchange's Volatility Index, or VIX, has traded at record highs for weeks, reflecting investors' concerns about the future of the market.
For the first time since Sept. 29, the VIX traded below 60 for all five trading sessions in a week. It ended at 54.28 and closed Monday at 56.76.

-- The Wall Street Journal

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