A portfolio of 8 stock picks from the edge

Yesterday morning, Chico’s (CHS) reported their second quarter earnings. As a brief recap, net sales decreased 7.1% to $405 million and net income fell 83% to $6.7 million or 4 cents per share. Same store sales at Chico’s stores declined a whopping 19%.

Usually an 83% decline in net income and 19% drop in same store sales would be taken as a bad thing. However, part of the idea behind the 8 Stock Portfolio is that these stocks have already been punished so much that all potential negatives (and then some) are already reflected in the price. In this case, the CHS responded to the earnings release with a 10% gap up at the open.

The CEO released some relatively positive comments stating, “We expect to see an improvement in trend and continue to believe we will be profitable in the second half.”

Regarding the “improvement in trend,” that’s another aspect of the idea behind the 8 Stock Portfolio. Many of these companies have been putting up horrendous numbers for the past year or more. At some point, it becomes increasingly difficult for things to continue getting worse. In order to “improve the trend,” Chico’s would need to do better than a 19% decline in same store sales. The bar has been lowered to the floor. It shouldn’t be very difficult to step over it.

Prior to the earnings release, Chico’s was down more than 10% since its selection for the portfolio on August 1, 2008. After rising yesterday and today, the stock showing a slight gain.