Streetwise

Lauren Rudd

Sunday, September 9, 2012

Lost my 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

It seems that every year the question is worded in a slightly different context but the underlying theme is always same. What is going to happen on Wall Street if...and here you can substitute the event de jour. For example, now the question is always, “How will the election affect the stock market?”

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 Bruce Springsteen’s song, “4th of July, Asbury Park (Sandy)” and who 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 everything and buy gold.” The result is a deafening din of ridiculous discourse.

Unfortunately, all the rhetoric in the world is not going to help your portfolio. What you need is a modicum of cool rationality, combined with a measure of forward thinking. Yet, if you are like many investors you feel that over the past several years 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 dialogue than I have space for here.

Meanwhile, you still have to deal with the current investment environment. Therefore, you might begin by ignoring the perturbations on Wall Street, while acknowledging that quality investment opportunities remain plentiful. A good example is Varian Medical Systems (VAR), a company that manufacturers cancer therapy systems. The demographic of an aging population plays a major role here.

When I last talked about Varian a year ago, my earnings estimate for the 2011 fiscal year ended September 30 was $3.48 per share, with a 12-month target price on the stock of $61, for an annualized capital gain of 15 percent. So how well did Varian do?

Earnings for the year came in at $3.44 per share, while the shares recently closed at $59.68. Although earnings and share price were off slightly from my forecast, last February or six months after I wrote about Varian the shares were trading at $70.80.

Here is another excellent example of where the implementation of a stop loss order could have protected your gains, while at the same time enabling you to repurchase the shares, if you so desired, at about $53 per share in mid-July of this year, thereby creating an additional return of 12.6 percent from that point until the present.

In doing so you are not morphing into a day trader addicted to charts rather than utilizing fundamental analysis with a long-term investment horizon. Rather you are simply modifying your position when the market has either over-priced or underpriced a company’s underlying value. This is no different from what Warren Buffett has repeatedly addressed as being the key to successful investing.

So how does Varian look going forward? The Company reported net earnings of $0.96 per share for the third quarter ended June 30, up 16 percent from $0.83 in the year-ago quarter.  Revenues were $705 million, an increase of 9 percent over the year-ago quarter.

The company ended the third quarter with $633 million in cash and cash equivalents and $175 million of debt. In its forward looking guidance, management is forecasting an increase in 2012 revenues of 8 percent, with earnings per share up by 8 to 9 percent.

The intrinsic value of the shares, using a discounted earnings model with a growth rate of 12.58 percent and a discount rate of 15 percent is $84. The more conservative free cash flow the firm approach yields an intrinsic value of $122 per share. My earnings estimate for fiscal 2012 is $3.75 per share, with a 12-month target price on the stock of $68, for an annualized capital gain of 15 percent.