THE BIGGER THEY COME, THE HARDER THEY FALL (or, what I learned from Krispy Kreme Donuts)

Saturday 6/7/2008 5:36 pm CT

By Dave Harris

News of the higher unemployment rate (it rose by 5 and half percent last month) and lower than expected job growth hit stocks hard last week with the Dow falling over 394 points. What a volatile market these days! On Thursday, the day before the dreaded jobs report, the market was jumping for joy over the solid May retail sales. In my view, it's not about inflation anymore. All eyes are on oil, hitting over $138 a barrel, and any data relating to consumer spending. 

That's why I believe retail sales on Thursday will be a bigger market mover than Friday’s consumer inflation data. Wal-Mart (WMT) reported a great 3.9 percent same store sales rise for last month. The stock is still pretty cheap, selling at only 18 times earnings compared to Costco (COST) at over 26! I have a buy on WMT here at roughly $58 per share.

Keep your eye on the railways like Burlington Northern Santa Fe (BNI) and Union Pacific (UNP). They have pulled back a bit because of the higher energy prices. Now may be a good time to pick up some shares. Burlington Northern is my favorite here at about 20 times earnings which is pretty good for the industry. That stock is a buy.

There are no significant market movers reporting earnings this week, but a little stock called Krispy Kreme (KKD) reports Monday and always reminds me of an important lesson. I was one of the lucky ones to buy into the stock in January 2003, and then sell it while it was hot a few months later. It was a trade, not an investment. But who would have thought the carb-conscious fad, among other things, would hit Krispy Kreme so hard and kill the stock? They still make great product-excellent donuts! I like the way the "HOT" neon light at their stores light up and glazed donuts are made right in front of you. But just because a company makes a great product doesn’t mean it’s worth the investment. Proper management, solid earnings history and good cash flow are among the many things necessary when considering where to invest your money. That was my lesson from the great-tasting Krispy Kreme donut company.