Tuesday, May 26, 2009

My Dog Is Smarter Than The Market

All Gertie cares about is food, sniff walks, car rides, favorite toys, and napping. As long as her five favorite pastimes are regularly available, Gertie is content. She knows what makes her life comfortable. She doesn't get confused by distractions.

The stock market is all about distractions. The job of the successful investor is to not get sidetracked by those distractions. Think of Warren Buffett and his ability to see clearly by living in Omaha and always remembering his Ben Graham teachings, not the latest fad or concern of Wall Street. We are bombarded by news that seems important, but isn't.

Today the market exploded because consumer confidence was improved. That market survey took the Dow up 200 points and consumer stocks like Cracker Barrel Restaurants up 10%. Earlier, traders were worried about North Korean nuclear tests. Rather than reacting to extraneous events like surveys and rogue nations, the smart investor needs to be focused upon items that really matter.

 With breakeven points lower, the missing ingredient for celebration is sales growth. A resumption of demand will result in wonderful profits on the lowered cost base. That growth may be a long time coming, not just around the corner because consumers say they are more positive. Unless you are really confident that the "greenshoots" are valid, and imminent, I'd recommend staying with steady, dividend paying stocks. We've dropped a huge percentage from the market top and only bounced back a small amount. Waiting for a clear signal is the prudent approach. Like Gertie, an investor needs to know what is truly important. That is sales growth. If volumes are dropping a company has to continually lower its breakeven point; necessary but not positive. Don't bet the farm until you see demand return.

If you can't wait consider Olin, the manaufacturer of chlorine products and Winchester ammunition. Nicely diversified, OLN has been growing ammo sales while it's industrial chlorine sales lag. But volume is UP. Better still is that you can buy it for 3.5X cashflow and get a 6.5% dividend. The dividend payout ratio is modest so the dividend is safe for the forseeable future. OLN sells for $13 and has $3 in cash. I've been nibbling for awhile. Gertie has her 5 keys to a good life and I have 4. Growing sales, modest debt, a safe dividend, and a low EV/EBITDA entry price. Olin passes the sniff test.

Time to nap with the dog.

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