You have probably heard it from thousand different sources – one of the reasons why hedge and mutual funds have trouble outperforming the S & P 500 is the increased correlation in the market. There are binders of research done on the subject, but what most have missed is the time-frame. Yes, in short-term perspective, correlation has risen to levels never seen before. During steep market corrections and the initial stages of a recovery, correlation often comes extremely close to 1.00, meaning that everything moves in one direction disregarding of underlying fundamentals and growth prospects. But if you take a step back and look at stocks from a longer-term perspective, you will realize that stock picking today matters as much as ever.
From a 10,000 foot view, Dillard’s and J.C. Penney are both simple department stores, which well being is highly influenced by the economic cycle. They both suffered 90% cut in market cap during the 2008/2009 financial fiasco, but as you can see from the chart above, their recovery stories are very different.
While $JCP is still struggling to hold above its levels from the fall of 2008, $DDS just hit another all-time high and it has come a long way over the past 4 years. You didn’t have to be a retail expert and addicted shopper to figure out which one would perform better. All you had to do is watch the 52-week highs list and shop your stocks from there.