Streetwise: Don't become unduly swayed by market negativism

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Maybe academic idealism has begun to warp my outlook on Wall Street. I admit that the Street has never been a walk in the park, and that greed and one-upmanship are part and parcel of the investment world. However, the indefatigable avarice, instability and volatility you see on the Street today extend beyond anything I can recall during my career of 40-plus years.

Meanwhile, October is upon us once again. It is also the most dreaded month in the annals of investing, the month of Black Mondays.

Does October really deserve its rotten reputation? There is some justification for the bad rap when you consider the debacle of October 1929. More recently, but still only history book material for most of those on Wall Street today, is the decline on October 19, 1987, that sent the Dow Jones industrial average down 23 percent. Moreover, we cannot forget the relatively minor "October massacres" in years such as 1978, 1979, 1989, 1997 and 2008.

With the S&P 500 index up 16 percent so far this year, it is no doubt tempting to take money off the table and spend the rest of the year on the sidelines rather than face the historically volatile fourth quarter. That is, however, a bad idea.

Since 2009, the S&P 500 index has gained an average of 9 percent during the last 3 months of the year. Over the last 30 years, stocks have moved higher during the fourth quarter 24 out of 30 times, gaining on average 7 percent.

Looking at those times when share prices have moved higher during the third quarter - 32 times in all - share prices have then proceeded to move higher during the fourth quarter 80 percent of the time, averaging a gain of 2.6 percent. And this was despite the greater-than-20-percent losses in the crashes of '29 and '87.

So what should you do in the upcoming fourth quarter? Your No. 1 goal should be not to become unduly swayed by market negativism, most often seeded by a variety of supposed experts and expertly cultivated by the media. Investing can be deadly if you dance along with the crowd for no other reason than to join in. Remember that investing in individual companies is not the same as investing in "the market."

Instead, determine what you can realistically expect from a specific company in terms of earnings over a 12- to 24-month period. Select quality investment candidates and you will receive quality share performance in return.

A good example is the WD-40 Corp. (WDFC). WD-40 lays claim to three nearly indispensable brands of lubricant, WD-40 in the ubiquitous blue and yellow can, 3-In-One household oil and Blue Works, a high performance dry lubricant. Other products include X-14 mildew remover and Carpet Fresh.

When I wrote about the company a year ago, my earnings estimate for the 2011 fiscal year was $2.15 per share with a 12-month target price on the shares of $45, for a capital gain of 12 percent. In addition, there was an indicated dividend yield of 2.9 percent. So how well did the company perform? Earnings for 2011 came in at $2.14, a penny light of my forecast, while the shares recently closed at $53.23, well exceeding my estimate, for a capital gain of 31.7 percent.

With sales in more than 160 countries, WD-40 recorded net revenue for the third quarter ended May 31, of $87 million, an increase of 2 percent from the third quarter last fiscal year. Year-to-date net sales were $257.9 million, up 5 percent from the same period last fiscal year.

Net income for the third quarter was $9.1 million, an increase of 13 percent compared to the prior year. Year-to-date net income was $26.5 million, an increase of 1 percent from a year ago.

The intrinsic value of the shares - using a discounted earnings model with an earnings growth rate of 12 percent, earnings of $36.4 million and a discount rate of 12 percent - is $58 per share. The more conservative free cash flow to the firm model yields an intrinsic value of $66 per share. My 2012 earnings estimate is $2.35 and $2.60 for 2013, with a 12-month target price on the shares of $60 for a 12 percent capital gain. There is also an indicated 2.20 percent dividend yield.

bizopinion

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com.


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