Streetwise

Lauren Rudd

Sunday, January 23, 2011

A Bit of Advice

Here is a bit of advice. Friendships, philanthropic endeavors and social standing, while laudable, are not qualifications to manage money. Unfortunately, rising volatility and the need to replace the yield lost from minimal interest rate returns leads to a willingness to gloss over credentials. Add in a dollop of wishful thinking, some rose colored glasses and voila, you have a deadly combination.

You cannot rely on anyone to part the Red Sea and guide you to the Promised Land of high returns. It is your responsibility to separate the wheat from the chaff. Furthermore, there is no relationship between historical and future stock prices. The past will not predict the future.

Does that mean you ignore historical data? No, you simply need to put the data in proper perspective. Think of it as a report card of corporate performance. Looking at the most recent earnings announcements, Apple would merit an A, while Citigroup would be taking home a D- and a notice of detention.

Unfortunately, whenever there is an increase in market ebullience, there is also a tendency to add credence to boisterous prognosticators. That is another mistake. Never take the opinions you hear or read (including mine) to be the gospel.

And never let anyone pressure you into making a quick investment decision. A person selling an investment is unequivocally biased. It does not matter how many letters they have after their name, how sincere they appear, or how long you have known them, they sell for a living. Always obtain an independent second opinion, whether from your own research or from an unbiased professional.

A no nonsense investment strategy will help you get through what will likely be at least another year of economic turmoil. Furthermore, virtually everyone, perhaps with a little training, can learn to select quality investments that will stand up to the test of time.

For example, you might want to give some thought to Abbott Labs, a company appearing here for the first time, particularly if dividends are an important consideration. The company has increased its dividend for 38 consecutive years and was titled a leading dividend stock by Barron’s. The current indicated dividend is 3.8 percent.

Abbott engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. It employs nearly 90,000 people and markets products in over 130 countries. Unfortunately, recent earnings have been a bit less than outstanding and the capital appreciation of its shares has been negative for a while. However, I believe that is going to change as the company heads into its 2011 fiscal year.

For its third quarter ended September 30, the company posted earnings of $891 million, or 57 cents per share, down from $1.48 billion, or 95 cents per share, a year prior. Excluding one-time charges related to acquisitions, the discontinuation of a product and an unfortunate product recall, Abbott earned $1.05 per share for the quarter.

The company has made three major acquisitions this year, including Piramal Healthcare Solutions, one of the largest generic pharmaceutical suppliers in India. As a result, worldwide pharmaceutical revenue increased 22 percent.

Revenues increased 12 percent to $8.68 billion from $7.76 billion, as sales of the rheumatoid arthritis and immune disorder drug Humira climbed 13 percent to $1.68 billion.

The intrinsic value of the shares is impressive. Using a discounted earnings approach, with a 15 percent discount rate and a conservative earnings growth rate of 9.7 percent, produces an intrinsic value of $61.55 per share. A more conservative free cash flow to the firm approach produces an intrinsic value of $130 per share. The shares recently closed at $47.20.