Streetwise

Lauren Rudd

Sunday, September 29, 2013

Investing Is Not Rocket Science

America’s middle class is barely keeping their heads above water, even as the economy slowly recovers from the Great Recession, while 95 percent of the gains from economic recovery since 2009 have gone to the famous 1 percent. In fact, more than 60 percent of those gains went to the top 0.1 percent, those with annual incomes of more than $1.9 million. The top 1 percent pocketed 22.5 percent of all income in 2012 the same as before the Great Recession and the Great Depression; up from 19.7 percent in 2011.

The average middle class worker continues to be weighed down by high unemployment and stagnant wages. Moreover, no one should be forced to spend their golden years working at subsistence level positions in order to survive. Investing, while not a panacea, can help you enjoy a better life and a more successful retirement.

Moreover, investing is not rocket science. A casual understanding of economic trends, a little basic finance to analyze earnings, and a dollop of common sense will enable you to establish a basic portfolio with a reasonable return. The absolute size of your portfolio is not nearly as important as your contributing to it on a regular basis.

Unfortunately, too many investors are wedded to the rear view mirror concept. That is wrong. It is a company’s projected performance going forward that should drive your investment decision. Yes, it is natural to lose faith when the market’s judgmental outlook is questionable. Volatility and uncertainty are frightening. Nonetheless, you need to constantly remind yourself that investing is about your success over 3-5 years.

To achieve that success, you will need to find those corporations with winning records of accomplishment that sell products you understand, which brings us to stogy old Wal-Mart (WMT). You may recall that Wal-Mart recently became a clear illustration of the Street’s irrationality. In summary, rumors hit the Street that Wal-Mart was cancelling orders to suppliers. The stock dropped sharply; not true said Wal-Mart later in the day and the shares rebounded. If you had sold on the rumor and then reestablished your position you were whipsawed by the market. Ignore the noise.

At the same time, I will admit that Wal-Mart has turned in a mixed performance of late. A year ago when I wrote about the Company, the shares had recently closed at $74.07 and my earnings estimate for fiscal 2013 (Wal-Mart’s fiscal year ends on January 31) was $4.95 per share with a 12-month target price on the stock of $82. So how did the Company do over the ensuing year?

Earnings for the fiscal 2013 year were $5.02 per share, while the shares recently closed at $75.75. Although earnings were 7 cents better than I had estimated, share price performance has been volatile since mid-May when the shares were nearly $80.

Second quarter sales, announced in August, were below expectations at $2.7 billion; however, they were an improvement over the first quarter. A key reason is that lower to middle-income workers, Wal-Mart’s bread and butter, are holding onto their money as they wait to benefit from the economic recovery. Nonetheless, earnings per share for the quarter did come in at $1.24, an increase of 5.1 percent.

Given the continuing economic pressures on Main Street, Wal-Mart continues to rely successfully on its price leadership. During the third quarter, the Company plans to add 7 million additional square feet which should accrete to earnings quickly. In it guidance for the year going forward, Wal-Mart is projecting net sales growth of between 2 and 3 percent with earnings-per-share in the range of $1.11 to $1.16.