Streetwise

Lauren Rudd

Sunday, June 20, 2010

Consider These Pearls of Wisdom

If tax increases, the deficit, inflation and potentially higher interest rates are clouding your investment horizon, cheer up, it could be worse. For example, consider these pearls of economic wisdom.

Rand Paul, the Senate candidate from Kentucky who does not support key provisions of the Civil Rights Act, is defending BP against criticism from the Obama administration. Meanwhile his Dad, Ron Paul, a Congressman from Texas, wants to abolish the Federal Reserve and return us to the gold standard.

Sharron Angle, who will face off against Senate Majority Leader Harry Reid, wants us out of the United Nations and would abolish the Department of Education and the Internal Revenue Service.

Former Hewlett-Packard CEO Carly Fiorina uttered this profound analysis of her opponent, Senator Boxer, “her hair is so yesterday.” H-P’s share price fell 60 percent during Fiorina’s 5 1/2 year tenure as CEO, while 3,000 employees lost their jobs and she received a $40 million golden parachute.

So what does all this have to do with your investment posture? A lot if you consider that supposedly rational (I use the term loosely) politicians, or those hoping to become politicians, advocate eliminating the Fed, the IRS, the Dept. of Education, placing us back on the gold standard and getting everyone to a hair salon.

What is next, a reincarnated version of the Crusades, or perhaps a rejuvenated Inquisition; or maybe we just cut to the quick and go straight to hunting and gathering?

Suppose we concentrate instead on an in-your-face energy-climate bill that actually reduces our dependence on fossil fuels and deals with climate change. Add in enforced financial regulatory reform to eliminate future economic calamity.

We need fiscal restraint but talk to the “small people” and see if raising employment does not take precedence. Finally, we must ensure our immigration policy attracts those who are productive while not denigrating us to where we advocate a police state.

What we do not need is irresponsible fear-mongering that runs the gauntlet from socialistic fantasizing to false fabrications about imprisoning people for not having health care. To confound and obfuscate for short-term political gain is not irresponsible, it is reprehensible.

Meanwhile, do not let fallacious political and economic myths disrupt your search for new investments. For example, a possible candidate for consideration is the Street’s latest casualty, Best Buy (BBY). Best Buy recently posted lower than expected first-quarter numbers, hurt by rising costs to expand its business and weaker consumer demand.

Actually, this was exactly the same story they told this time last year. My earnings estimate back then was $2.90 per share and $3.30 per share for FY 2011. Earnings for FY 2010 came in at $3.14 per share. My 12 month price target on the shares a year ago was $40 per share. The shares recently closed at $38.56, but only after dropping from $41 per share on June 15, as a result of the latest quarterly report where the company posted first quarter ended May 29 earnings of 36 cents per share, as compared with 36 cents per share a year ago.

Probably what shocked the Street the most was that selling, general and administrative (SG&A) expenses were 23 percent of revenue for the quarter, up from 21.9 percent a year ago. The company said the increase was driven by new stores, higher investments to raise sales and foreign currency fluctuations. However, Best Buy also reiterated its earnings guidance for 2011 of $3.40 to $3.60 per share.