Streetwise: Seek out investments that benefit from slow global economic growth
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If the erratic, unpredictable nature of the stock market has you wondering if Wall Street is the street you should be on, maybe the following comments will help shine a bit of realistic light into that dark abyss we call the future.
Take time to search out those investment candidates most likely to benefit from continuous albeit slow global economic growth, companies such as Joy Global (Ticker: JOY). I am discussing Joy because the company, in addition to being one that I have received numerous questions about recently, illustrates two key investment points.
Joy engages in the manufacture and servicing of mining equipment for mineral extraction worldwide. A year ago, my earnings estimate for the fiscal year ending in October was $6 per share, with a 12-month target price of $113. The company earned $5.92 and the shares recently closed at about $54.
This clearly illustrates a point I have made repeatedly. You need to watch your investments. When the shares were selling at $92 as recently as late February, a sell stop order at around $85 was necessary. While still giving back about $7 per share, it would have staved off a round trip loss of an additional $31.
So how do you know when and at what price to add a stop loss? You don't; you estimate what you are willing to give back, in this case about 8 percent of last February's share price. If the stop loss is hit, you can then move on to the second key point, which is whether you should repurchase the shares after they have plateaued lower. The answer is easy to write but time consuming to implement. You need to do a full analysis on the company and determine if you still like the shares today.
In the case of Joy, second quarter bookings were $1.2 billion, compared to $1.5 billion a year ago, a decrease of 19 percent. However, net sales increased 45 percent to $1.5 billion when compared to the same period last year.
Operating income was $333 million in the second quarter of 2012, compared to $234 million a year ago and was 22 percent of sales in both years. Income from continuing operations was $218 million or $2.04 per share for the second quarter compared to $162 million, or $1.52 per share a year ago.
Looking at the intrinsic value of the shares, the discounted earnings model produces a result of $176, while the more conservative free cash flow to the firm model produces an intrinsic value of $144. My earnings estimate for this fiscal year is $7.25 per share and $7.75 per share for fiscal 2013 with a 12-month target price on the shares of $62 for a 22 percent capital gain. In addition, there is a dividend yield of 1.40 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com.
First Published July 20, 2012 9:44 pm