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Dicks Sporting Goods Inc (DKS), Foot Locker, Inc. (FL): Should You Follow Ron Baron’s Money?

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On July 8, 2013, Ron Baron appeared on CNBC and predicted that the Dow will reach 30,000 in 10 years and 60,000 in 20 years. This is simply based on a compounded rate of 7% annual growth. He also stated, “Companies have almost doubled their earnings in the past 13 years while stock prices have only increased 25 percent.” While this might be true, it has become frighteningly evident that top-line growth has been subpar.

Investors should know that 12 of 30 (40%) of Dow-component companies saw revenue declines in 2012. These companies include Chevron Corporation (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM), United Technologies,JPMorgan Chase & Co. (NYSE:JPM), Alcoa Inc (NYSE:AA), Merck & Co., Inc. (NYSE:MRK), DuPont, Bank of America Corp (NYSE:BAC), International Business Machines Corp. (NYSE:IBM), Pfizer Inc. (NYSE:PFE), Intel Corporation (NASDAQ:INTC), and Hewlett-Packard Company (NYSE:HPQ).

These trends might change, but this isn’t about pointing out specific companies that are underperforming. The ultimate point is that many large-cap companies are incapable of growing revenue in a highly accommodative economic environment. Therefore, if monetary stimulus measures were removed, many stocks would be susceptible to strong downside moves. Companies, big or small, can improve earnings by cutting costs, but that trend isn’t sustainable over the long haul; top-line growth must be present, as it indicates real growth.

All that said, it’s possible that American companies are so adept at cutting costs and maneuvering to meet or beat expectations that Ron Barron is correct. If you think he’s right and you want to invest along with him, then you should know that he recently poured some money into Dicks Sporting Goods Inc (NYSE:DKS). Even if you disagree with him on the broader market, perhaps you’ll agree on this specific investment.

Foot Locker, Inc. (NYSE:FL)A hungry company

Unlike the 12 companies listed above, Dicks Sporting Goods Inc (NYSE:DKS) has managed to consistently increase annual revenue. Earnings have also improved on an annual basis; however, Dicks Sporting Goods Inc (NYSE:DKS) reported a loss in 2009. Therefore, it’s not resistant to a weakening consumer. It’s also not resilient to broader market corrections, as the stock depreciated approximately 40% during The Great Recession. On the other hand, the stock held up better than Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL), which both lost about 50% of their value.

Dicks Sporting Goods Inc (NYSE:DKS) currently owns 525 stores throughout the country, and it plans on opening 40 new stores throughout 2013. Eventually, it wants to have a total of 1,100 stores in the United States. This might be a little ambitious.

Dicks Sporting Goods Inc (NYSE:DKS) is playing into health and fitness trends. It offers traditional sporting goods and apparel, but it also caters to those interested in exercise equipment. Additionally, it has marketed to a growing number of fitness-oriented female consumers. According to Alexa.com, females are slightly overrepresented at dickssportinggoods.com, which might come as a surprise to many people. Also according to Alexa.com, pageviews and time-on-site have slightly increased over the past three months.

Management expects revenue to increase 3% in 2013, and RBC Capital recently rated Dicks Sporting Goods Inc (NYSE:DKS) a “Sector Perform” and set a $55 price target.

Related options

Foot Locker, Inc. (NYSE:FL)’s vision is “To be the leading global retailer of athletically inspired shoes and apparel”. The company’s goals include being customer-focused to help drive performance, to make stores and Internet sites more exciting, to deliver exceptional growth in high-potential business segments, and to aggressively pursue brand expansion.

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