Streetwise

Lauren Rudd

Sunday, September 26, 2010

Investing Without a Crystal Ball

“Persons pretending to forecast the future shall be considered disorderly under subdivision 3, section 901 of the criminal code and liable to a fine of $250 and/or six months in prison.”

                Section 889, New York State Code of Criminal Procedure

This market is frightening. Do you have any advice? Oh, to be a soothsayer of such repute so as to know all the answers. Unfortunately, with the passing of Madame Marie, who is memorialized in the words of the Bruce Springsteen song, “4th of July, Asbury Park (Sandy)” and was actually arrested at one time under the above statute, I am completely out of crystal balls.

Nonetheless, there are countless prognosticators willing to offer up unsolicited opinions for a “small” cash payment on your part. They run the gamut from the biased and mundane to such nonsensical advice as, “sell all your stocks.” The result is a deafening din of ridiculous discourse.

Moreover, all the rhetoric in the world is not going to help your portfolio. What you need is a modicum of cool rationale combined with a measure of forward thinking. Yet, if you are like many investors you feel that Wall Street has shredded your life, your livelihood and burdened future generations with a crushing debt. Actually, it probably has but that requires a considerably longer discourse than I have space for here.

However, not to downplay the gravity of the current situation, but the speed of ongoing economic recovery is picking up speed, analogous to a train’s locomotive. The initial motion of a locomotive is nearly indiscernible. But then it begins to slowly pick up speed, its wheels sometimes aided by sand to prevent slippage (analogous to stimulus programs). And in short order it gains traction and finally reaches undaunted speed despite pulling a mammoth load, in this case the national debt.

Unfortunately, unemployment is tied not only to the speed with which the economy gains traction but also to productivity. Companies have learned they can do more with less. Nonetheless, unemployment will decline over time and will act as a self-perpetuating stimulus to the economy free of taxpayer involvement.

None of which negates the fact that you still have to deal with the current investment environment. Therefore, begin by ignoring the perturbations roiling the financial markets and do not let the reactions of others drive your investment strategy.

Many quality companies are continuing to do business as usual. A good example is Varian Medical Systems (VAR), a company that manufacturers cancer therapy systems. When I last talked about the company a year ago, my earnings estimate for the 2009 fiscal year ended September 30 was $2.65 per share. My 12-month price target on the shares was $45, as compared to a price back then of $39. The company did earn $2.65 per share and the shares recently closed at $59.92 for a capital gain of 53 percent.

In its third quarter report ended June 30, net earnings from continuing operations were $0.74 per share, up 9 percent from the same period a year-ago. Revenues were $578 million, up 13 percent from the prior-year period and also up 13 percent on a constant currency basis. Net orders totaled $629 million, up 14 percent from the year-ago period and up 15 percent on a constant currency basis.  The quarter-ending backlog was $2.1 billion, up 7 percent.

The company ended the quarter with $588 million in cash and cash equivalents and $23 million of debt.  During the third quarter, the company spent $116 million to repurchase 2.3 million shares of common stock. Compared to the same period last year accounts receivable day-sales outstanding was 80, an improvement of three days.