Value Creation in the Land of Day Traders - 4 / 27 / 2009

We have recently established that the market gyrations of late amount to deep pocketed day traders trying to beat other speculators into the next index momentum move, up or down. I add to that today's "Swine Flu" concerns. "Futures Lower Based Upon Swine FLU". This is time to be investing people. The financial media has lost its way. And when unsure how to bring value to their viewers and readers, they resort to attaching silly explanations to the momentum trades of the day. Put your value caps on and seek out those great companies you could not afford only a year ago. They are selling at relative bargains.

Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.

Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.

Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".

Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.

Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.

But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.

So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.

Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.

Build Value Every Day
Brad van Siclen