Pier 1 Imports – An Example of How Percentage Gains Can Mislead

Wednesday, March 17, 2010

An investment manager was once asked how he liked being judged by performance numbers. He replied that he was fine with it – so long as he got to pick the beginning and ending points.

We’re seeing articles written that do just that, particularly since we are now one year from the stock market’s March 9, 2009, low. This article about Pier 1 Imports (PIR) is one example: “Pier 1’s New Strategy Still Pays” (The Wall Street Journal, ‘Heard on the Street’, March 15). It started with this eye-popping performance comment:

Call it a peerless rally. Pier 1 Imports shares traded for as little as a dime last year, but have since surged to more than $7, outracing nearly every stock in the market

“A dime!” we say. “Where was I? I would happily have bought some shares! Then, I, too, could have earned over 7,000% on my money.” Well… This was in the time of companies going bankrupt, and Pier 1 reached that price level because it was on the verge. Besides, who knew ten cents was going to be the bottom. How about a quarter, or a dollar? Then how would we feel? Would we have stuck around for the rise to seven dollars, or would we have bailed out with a loss?

Nevertheless, it is true that the stock rose from a low of a dime. But the stock didn’t really start there. That is the cherry-picked low reached only on March 12 and March 13, 2009. The company and stock had been around for years before then. In fact, five years prior (March 2004) the stock was at a high of twenty-five dollars. So, the long-term investor had to first endure a -99.6% drop in order to earn that 7,000%.

Below is the picture of that plummet and partial recovery. Wal-Mart Stores (WMT) and the Dow Jones Industrial Average are shown for comparison.

Note that -99.6% + 7,000% = -72%. I covered this timely subject in “Percentage Arithmetic – When Numbers Don’t Add Up.” 

So, keep an eye out for cherry-picked results that show giant percentage gains, and then try to make something of it.

A good example of a bad article is in the same issue of The Wall Street Journal: “Wounded Stocks Lead Rally” (March 15, page C-1). This poorly written article starts out with the pronouncement that “Investors are flirting with danger again.” The reporter then uses a mish-mash of these big percentage returns to prove that investors are chasing risky stocks and driving them up faster than “safe” stocks.

The real conclusion should be that the stock market continues to recover, and that the underlying strength in the economy is reaching even the weaker, beaten down companies. This is good news – not a sign of risky speculation. That will come later. First, investors have to start putting a positive net flow into US stock funds instead of being net sellers.

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March 2010