NEW YORK — Hot growth stocks in the apparel sector look poised to cool down, and given their dizzying performance and inherent volatility, they could fall a long way.

This story first appeared in the July 12, 2004 issue of WWD. Subscribe Today.

The WWD Growth Portfolio, which tracks the performance of 15 wholesale and retail apparel growth stocks, has shot up more than 20 percent in the first half of the year. By comparison, the S&P 500 gained 2.9 percent for the period.

The growth portfolio, which includes Urban Outfitters, Quiksilver and Chico’s FAS, among others, buried not only the broader market, but the WWD Value Portfolio, as well, which gained a robust but distant-second 5.6 percent. Stocks in the value portfolio include stalwarts such as Saks, Federated and VF Corp., among others.

Given the stellar returns apparel growth stocks have achieved year-to-date, investors may be tempted to ride that wave to ever-greater heights. That, however, appears to be an increasingly risky proposition.

“The fade of the U.S. consumer coincides with a booming industrial side of the economy,” wrote A.G. Edwards & Sons analyst Robert Buchanan in a report to investors. “This bad combination is a decided negative inasmuch as consumer-related cyclicals are in constant competition with stocks in other sectors.”

If consumer cyclicals are in danger of cooling off, then apparel growth stocks are even more vulnerable. Growth stocks are typically associated with younger companies that promise very high rates of earnings growth going forward and are thus overpriced. Value stocks tend to belong to mature companies whose days of heady growth are over. Their shares are relatively cheap and are considered a good value. In short, they’re boring.

But they’re also much less risky. Perhaps the most ominous sign that WWD’s apparel growth stocks are set to underperform is the fact that in the broader market, growth stocks are starting to take off after lagging value throughout the first half.

For the year-to-date, the Russell 3000 Value Index returned 4.23 percent, while the Russell 3000 Growth Index gave back just 2.96 percent. Over the last three months, however, Russell Value slowed, growing only 0.9 percent versus a 1.8 percent gain in the Russell Growth. If the larger market is starting to shift toward growth, then apparel growth stocks, which, as early-cycle stocks tend to move ahead of the overall market, have theoretically run their race and should start to counter-cycle down.

Of course, when stocks such as Charlotte Russe, Aeropostale and Urban Outfitters are up more than 50 and even 60 percent on the year, its hard to sell those positions. Then again, Berkshire Hathaway chairman Warren Buffett — reportedly the second-richest man in the world with a net worth of $43 billion — is the penultimate value investor.

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