Streetwise
Lauren Rudd
Sunday, February 21,
2010
Avoid the Purveyors of Deception - Go It Alone
Several recent conversations with some of my students
indicated a consensus in that their objective is to learn how to achieve rates
of return on their portfolios in excess of those offered by Treasury securities
or bank CDs. At the same time their voiced tolerance for risk varied
considerably.
I applauded their desire to plumb what some perceive to be a
world of unfathomable complexity. Yet, I was also reminded that for a few of
them the classes came too late to ward off their past fate of being among those
that suffered at the hands of Bernie Madoff.
Unfortunately, you do not have to wait for the likes of a
Madoff, or even a lesser Ponzi scheme, to find yourself at the short end of the
investment stick. The less than scrupulous have an uncanny ability to ferret out
those possessing the deadly combination of wealth and a lack of investment
sophistication.
Wealth derived from achieving professional success in areas
such as sports, law, medicine or the entertainment industry, does not bestow a
comparable level of investment expertise. Alas, neither does eligibility for
Social Security.
To the detriment of the gullible, enviable returns are
offered up by supposed experts who claim to have an inside track (they don’t
because there is no such thing). They proffer as evidence a stream of letters
after their name, and their association, however tenuous, with a firm or person
of some repute.
Although skirting the edge of illegality with their promises,
these purveyors of deception often remain sufficiently on the side of the law so
as to avoid prosecution. Even in the best of scenarios the promised returns are
rarely forthcoming. And more often than not the principal is either seriously
depleted or lost altogether.
Yet, competent investing is not difficult. Many companies
offer dividends in excess of 5 percent. Track records of increased earnings and
capital appreciation abound.
Commission rates as low as $7 per transaction are readily available.
A good place to begin your research is with Sherwin Williams,
the nation’s largest paint manufacturer. Undaunted by the recession, it
continues to cover the world. On a global basis, it is second only to Akzo
Nobel.
Sherwin Williams' vast array of products includes a variety
of paints and finishes sold under such names as Sherwin-Williams, Dutch Boy,
Thompson's, and Minwax in more than 3,300 retail stores throughout North
America.
The company recently announced its financial results for the
year ended December 31, stating that net sales fell 11.1 percent to $7.09
billion. Currency translation was responsible for about 1.3 percent of that
decline.
Net income was also lower for the year, falling 5.5 percent
to $3.78 per share on a GAAP basis, as asset impairment charges and a loss on
dissolution of a foreign subsidiary reduced the bottom line by approximately 13
cents per share. Acquisitions and currency translation charges took away another
4 cents per share.
On a more positive note, the company’s year-end working
capital ratio (accounts receivable plus inventories less accounts payable
divided by sales) increased from 10.7 percent to 11.2 percent. At the same time,
net operating cash was 12.1 percent of sales, as compared to 11 percent in 2008.
The company’s earnings guidance for 2010 is $4.05 to $4.45 per share
A year ago when I wrote about the company, my earnings
estimate for 2009 was $3.80 per share, with a projected 12-month share price of
$50. The shares recently closed at $64.39, for a 12-month gain of 39 percent.
The intrinsic value of the shares using a discounted earnings
model is $72 per share, assuming an earnings growth rate of 10 percent and a
discount rate of 15 percent. The more conservative free cash flow to the firm
methodology yields an intrinsic value of $71 per share.
My earnings estimate for 2010 is $4.48 per share with a
12-month target price on the shares of $73 for a gain of about 15 percent. In
addition, there is a 2.2 percent dividend yield.
