Streetwise

Lauren Rudd

Sunday, August 25, 2013

Tips Are For Horse Races

Whenever I mention that I write about investing in stocks, the response is not only predictable but can be divided into three distinct categories. The first is, “Wonderful, do you have any hot tips?” However, I must point out that there is often a tone of sarcasm nowadays from those who left Wall Street after the dotcom era and headed directly into real estate since you never lose money investing in brick and mortar.

In the past I tried to educate these misguided souls, thereby leaving the hot tip emporium to the horse racing crowd. However, to utilize an equine metaphor, you can lead a horse to water but you cannot make him drink. Therefore, over time I have learned to shorten my response to a single word...no.

The second category of individuals look at me askance, their faces blanching as they put forth a diatribe on how nobody makes money on Wall Street and how whenever they have taken somebody’s investment advice they lost money and am I aware of what has happened on Wall Street recently?

No sir, their money is staying right where it is, in a government guaranteed certificate of deposit or savings account. Tactfully, I do not point out that after taxes and inflation, it is probably also generating a negative return.

Finally, there are the well intentioned who blindly follow the advice of someone they barely know and invest in companies or mutual funds they know little about except for some glossy pictures in a marketing brochure or annual report. The hype is high, as are the commissions and fees, but not the performance.

Many of you research an automobile down to the tire size, or know the number ice cubes per hour a new refrigerator puts out, yet when it comes to investing your hard earned money you pass up readily discernible and potentially rewarding blue chip investment opportunities. Moreover, the total commission, there are no fees, is generally less than the price of lunch at McDonald’s.

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.