Diversification Wins. Again.

Investors have long known about the benefits of diversification. The don’t-put-all-eggs-in-one-basket approach to stock picking ensures your exposure to single-stock risk is limited.

But some businesses are slow to learnrn the wisdom in this approach. Take Callaway Golf (NYSE ELY) for example. The company is clearly wed to the golf industry, which, as Rodney points out, is struggling.

Callaway’s total revenue has declined every year since 2010 and its net income hasn’t been positive since 2008. You read that right. That’s four straight losing years. And this year’s on the same track.

Callaway Golf is one of those stocks that just never found its feet again after the broad market crash in ’08 and ’09. Take a look…

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Nike (NKE), Dick’s Sporting Goods (DKS), and Foot Locker (FL), like Callaway, are exposed to the waning interest in golf.

Yet, you can’t say that Nike, Dick’s and Foot Locker are “golf stocks.” They’re diversified. Nike sells golf gear… as well as basketball, baseball, soccer and swimming paraphernrnalia (just to name a few items). As retailers, Dick’s and Foot Locker sell a number of brands aimed at many different niches within the athletics and exercise markets.

But that’s what makes the differences in the performance of these stocks so telling.

While Callaway dropped 65% into 2009 and is still 48% below its starting-2007 price, diversified sporting goods obviously did better. From the beginning of 2007, Foot Locker rose 50%, Dick’s increased 123% and Nike led the pack, gaining 175%.

If you’ve ever shopped at a yard sale (I haven’t), or driven by one (I have), you know that lightly-used exercise and sports equipment tends to be a staple, even as the specific type of gear, like stationary bikes, elliptical runners, air hockey tables and trampolines change with the fads.

I’m not ready to say the sport of golf, or rather its gear, is destined for America’s yard-sale graveyard. But rising demand for all things golf is NOT a trend I’d bet on in the coming years.

And I’d certainly look to diversified sporting goods stocks, like Nike, before Callaway.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.