baby registry: Baby, Baby, Baby

6/20/2006 2:03 PM ET
By Mark Fightmaster (mfightmaster@sir-inc.com)


In the course of the next 17 days, my wife Valerie and I will send out cute little invitations, purchase a few toys, get a new outfit, bake a cake, and get the house ready, all for the impending one-year birthday for the Fightbaby, Tess Ryan. Yes, last July 7th our world was changed forever when we were blessed with a bouncing baby girl, and you never realize how fast time flies until you are a parent. Anyone that walks past my luxurious cubicle can tell you how I feel about the little Loch Tess Monster; it is hard to miss the shrine. Reflecting on the past year makes me smile, but it also makes me realize how much "stuff" we purchased and had purchased for us. People spend quite a bit of money on babies, be it through direct purchase or by people filling in a baby registry. Someone has to be making some money, right? Whilst spending last night caring for the Fightbaby, my mind wandered to today's observation, what companies are capitalizing on the never-ending need for baby stuff? Digging around a bit, I found four different companies that produce baby things, and I think there are some interesting investing opportunities here. Today we will look at Novartis, Carter's, Children's Place, and Johnson & Johnson.

Novartis: (NVS: sentiment, chart, options) What is this company doing on the list? One look at the first few lines of NVS's description in Hoover's states that the company produces drugs that are used in treatments for nervous system and ophthalmic disorders, cardiovascular diseases, and cancer. Granted, some babies may eventually have use for these drugs, but what immediate service does NVS provide the parent? Digging further down in the description of the company I find this line: "Novartis is also the proud parent of the Gerber baby." In fact, I was doing a search for Gerber when NVS was returned as a result.

So NVS produces Gerber products, a mealtime essential in the Fightmaster household. The company is responsible for that pink and green sippy cup that Tess turns into a projectile at every dinner. The branch of NVS is also responsible for the lovely chunk-filled, stage-three baby food that she is constantly turning her nose at, the little rubber-tipped spoon that she pushes away from her mouth, and the little fruit puffs that Gussie and Marley (our dogs) like to pick up off the floor after the Tessalump (yes, a play on Pooh's friend the Heffalump) eats. In fact, the company also produces the freezable teething ring that the toothless wonder uses to sooth her flaming gums on a nightly basis. If Gerber products are this integral in our household at meal time, I am sure that my colleague Joseph Hargett and his wife have a number of Gerber products in their house for their new daughter Isabella. The same goes for my brother, sister-in-law, and their 16-month old daughter Morgan. How can the company not be making a ton of money off of babies?

Technically, NVS is solid. The equity is in the process of pulling back to the support of its 80-week moving average. On three other occasions, this trendline has propped up the shares and eventually sent them on their way higher. Furthermore, I have drawn a line on the chart below to show that the stock is also pulling back to the lower rail of an uptrending channel that has helped guide it higher since November 2003. In reality, this is more of an extension of the 80-week moving average, but it should not be ignored.

Spanning out to a longer-term picture also shows a fair amount of technical support for NVS. The shares still enjoy the support of their 10-month and 20-month moving averages. In fact, the equity has not finished a month below this tandem support since October 2003. This double-barreled support helped propel NVS through resistance at the 44 level, which caused a double-top formation in 2001 and 2002. Yes, the stock has pulled back, as has the market as a whole, but its 20-month moving average is poised to help guide it higher again. Furthermore, it certainly looks as if the 52 level is going to try and help the equity rebound, as it did in November and December 2005.


When it comes sentiment, I would really like to see a bit more in the form of short-covering support for NVS. Less than 0.50 percent of the firm's float is sold short, and it would take roughly two days to cover these shorted shares. This configuration lessens the chance for short-covering support to boost the shares.

I would also like to see more pessimism from the analysts. According to Zacks, all eight analysts covering NVS rate it a "buy" or better. Should this glut of optimists have a change of heart and issue downgrades, the ensuing downward pressure should cause NVS to test the support of its 20-month trendline.

That said, the speculative options crowd is rather bearish on NVS. The company sports a Schaeffer's put/call open interest ratio of 0.59, which is higher than 73 percent of those taken during the past 52 weeks. I like this kind of pessimism from the options players. Bottom line, NVS earns a 4.0 out of 10 on our Schaeffer's Equity Scorecard. This is a middle-of-the-road reading, and I think the firm's technical performance warrants a look on the bullish side.

Carter's: (CRI: sentiment, chart, options) One of my responsibilities around the house is getting the Fightbaby ready for bed. Sometimes there is much crying and gnashing of gums from the toothless wonder, other nights she falls asleep nearly instantly. One constant is the zip-up pajamas, complete with the feet that she wears on a nightly basis. More often than not, the tag will carry the name Carter's. CRI does not limit its offering to pajamas, and neither does Tess's wardrobe. New parents will find the Carter's name on layettes, clothes, and even on strollers, toys, and shoes.

The technical growth for CRI hasn't been as steady as NVS. In fact, the stock lost 10 percent earlier in the week, thanks to general market weakness, and increasing competition. An analyst at Goldman Sachs verbalized worries about broad-market issues, competition, and how higher gas prices may affect CRI's outlet stores. Suddenly, the stock plummeted through all known layers of support. The shares seem to have found a bit of support near the 24 level, but my how they have fallen.


CRI's Scorecard rating of 4.0 is exactly the same as NVS's, but these two are not identical twins. CRI's sentiment is weak (as is NVS's), but its technical outlook is not as promising as NVS. Give CRI some time; let's see if it can get back to the winning ways it enjoyed before the recent negative developments. If the stock can reclaim some of its past support, it may be worth a look.

The Children's Place Retail Stores: (PLCE: sentiment, chart, options) From one clothing company to another. The Lump (an unfortunate nickname that has stuck) also has some of PLCE's offerings in her wardrobe. It shouldn't be a surprise, as Hoover's credits some 800 plus stores in malls and outlet centers in the U.S. and Canada to the PLCE name, and the firm's store count is increasing by roughly 30 percent each year. In addition to its eponymous stores, PLCE owns roughly 315 Disney Stores, which it bought from Walt Disney.

Like CRI, PLCE sells baby, toddler, and children's clothes; unlike CRI, PLCE is performing well. Compared to the S&P 500 Index (SPX) on a monthly basis, PLCE has outstripped the shares for the better part of the past 3.5 years. Looking at the monthly chart below, notice that the equity's 10-month and 20-month moving averages have pushed it higher since February 2003. This support helped the shares advance through resistance at the 55 level, which now seems to be acting as support.

There is little in the way of options-related support or resistance in PLCE's path, so we have to look at any technical issues. There may be a bit of resistance ahead at the 62 level, so keep an eye out there.

Let's first deal with the aspects that I don't like about PLCE's sentiment. The speculative options crowd is nearly evenly split on PLCE, demonstrated by its SOIR percentile ranking of 51. Rather non-descript, but what bothers me a tad is analyst coverage. According to Zacks, PLCE receives four "buy" or better ratings, and one "hold." With nary a "sell" in sight, the risk of downgrades worries me.

With a Schaeffer's Equity Scorecard ranking of 5.0 out of 10, what possible reason is there to be bullish on PLCE? Other than solid long-term technical performance, not much; unless you take the potential for a short-covering rally into account. More than 10 percent of PLCE's float is sold short and it would take roughly six days to cover these shorted shares. This combination could provide the means for a substantial short-covering rally should good news cause the short sellers to buy back their bearish bets. I believe that PLCE deserves its own place on the bullish side of your portfolio.

Johnson & Johnson: (JNJ: sentiment, chart, options) Finally, we turn our attention to the baby behemoth, the maharaja of mamas, the Dalai Lama of dadas, the soother of all cries, JNJ. Bath time isn't bath time unless it is fueled by JNJ products. Baby shampoos, soaps, lotions, washes, and even pre-soaped washcloths are included in the firm's stable. Oh, and don't forget the JNJ baby powder after the bath, or you may need to use another JNJ product, Balmex, to cure the diaper rash. I like to call JNJ's lotion "baby potpourri," as it is the only reason that every new parent's house doesn't reek of baby poo.

Enough of that, technically, this Dow Jones component is solid. Let's look first at a weekly chart for JNJ. Yes, the stock spent the better part of 2005 in a downtrend, but notice that the situation seems to be turning to the better. The shares recently reclaimed the support of their 10-week and 20-week moving averages, pulling the former into a bullish crossover of the latter in the process. This technical formation often hints that there is further technical prosperity ahead. Of course, a bullish cross does not mean that the road is clear of obstacles. JNJ faces rather staunch options-related resistance at the 60 and 65 levels.

Some support may be found in the form of JNJ's 50-month moving average. Since this trendline's inception, the equity has finished below it only a handful of times. Of course, this trendline looks like it may be rolling over, which would send its support lower. On the other hand, the stock is currently above the 60 level. As prior resistance, this level may now switch roles and act as support. We will have to wait and see if this is the case.

JNJ faces a fair amount of technical resistance, but one should know that the Dow component has recently claimed its outperforming ways when compared to its blue chip brethren.

How does sentiment stack up on JNJ? The firm receives the requisite love from the speculative options bunch, as its SOIR of 0.65 is lower than 79 percent of those taken during the past 52 weeks. What's more, there isn't much in the way of short-covering support to help boost the stock.

What I find surprising is the level of apathy from the analyst community. According to Zacks, eight of the 17 analysts covering JNJ rate it a "hold" or worse. Yes, there is plenty of room for downgrades to push the equity lower, but upgrades could have the opposite affect.

JNJ earns a 7.0 out of a possible 10 on our Schaeffer's Equity Scorecard, indicating that it should find less resistance to an upside move. Will this be the case? Technical support is certainly in place, but overhead options-related resistance bothers me a tad. This does not mean that you shouldn't look at JNJ bullishly, I do, but a further rejection at 65 or 70 could send the shares reeling. Watch the stock carefully, the next major news event is next month's earnings report. Better-than-expected results could help break the overhead resistance and send the stock higher still.

Bringing today's observation to a close, let's review the stance I have on these four baby-related stocks from an Expectational Analysis ® point of view. I am bullish on NVS, PLCE, and JNJ, while CRI is left crying in the bearish pen all by itself. I hope you have enjoyed reading this as much as I have writing it, good luck and happy trading!

-Mark Fightmaster (mfightmaster@sir-inc.com)