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Stock Ideas Investors Daily Edge Bailout, Breakdown, Confusion… This Is What You Do Now
Stock Ideas Investors Daily Edge Bailout, Breakdown, Confusion… This Is What You Do Now 
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The dollar index The Bear Stearns rescue and the Treasury department’s call for a new “blueprint” have helped ignite a rally in financial stocks… but it seems nothing can kickstart the dollar. |
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| Bailout, Breakdown, Confusion… This Is What You Do Now |
| Thursday, 25 September 2008 | ||||||||
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We will trust to the other two million financial writers to wax belligerent over the bailouts and failures in the banking and insurance community today. Understanding the nature of the problem is unimportant. You got that right. Interesting perhaps, but unimportant at the moment. What you need more at this very moment is a sane plan for your stock portfolio. Should you bail out, buy like crazy, pile up cash? Is any institution trustworthy now? Let’s work on your stocks that are not banks or brokers or related financials. This should be most of your stocks unless you were modeling the horrendously overweighted Dow Industrials. What you do about those stocks is this: look forward. With information, of course. The week before last, with the first wave of the latest bailout and rescue news, that’s exactly what I did for my readers for all the stocks I cover in Rising Tide. Rising Tide is long-term value oriented, so our only important question centered on that exact objective: what was the longer-term outlook for each stock? Market prices represent what people think (not know) at that moment. When people aren’t thinking clearly at all, you should not expect to find wisdom in stock quotes. You’ll have to provide your own. How do you look forward with some confidence if you are not an analyst yourself? Simple, you use their skills. Don’t get caught in the game of thinking everyone on Wall Street is an idiot. It just is not so. The big shot traders and division VPs may have been trading
mortgage bundles, but not the analysts in the back office. Rank and file stock analysts are just that—analysts, not traders—they stayed busy doing their usual research on companies, trying to figure out how future earnings prospects will look. They know a lot about their companies and their industries. There’s a great deal of chest puffing among the financial writers about how analysts get their estimates wrong all the time. You should ignore that self-important flimflammery as well. Of course analysts get the pennies wrong. Who wouldn’t? But they do tend to be right about broad direction and general tendencies more often than not. And that’s all you need from them right now. (Just ignore the buy-sell-hold advice, though.) If you want to make good decisions about your investments, take a few moments today and do exactly what I did for Rising Tide readers. Find out what analysts expect your companies to earn next year and the year after. You can get this from your broker, an S&P report or even Yahoo! Finance. Compare that to expected earnings this year. What’s the trend—will the company’s earnings increase 20%? If so, it’s a keeper. Or are they likely to go down—then think about unloading. Let’s do a quick one for practice to show you how: Take Coca-Cola, a stock millions of investors own. Yahoo! Finance says analysts expect Coke’s earnings to be 3.08 this year and $3.38 next year. That’s a 9.7% increase in earnings per share on a highly profitable (big return on equity) mega-corporation. That’s pretty good. In doing this, I found that most Rising Tide stocks are in line for 20% or better earnings growth. That’s the decision maker for me—not what someone I don’t know well enough to trust says on CNBC tonight. This exercise can be enhanced if you are more sophisticated about analysis. I calculate an appropriate future price based on historical P/E ratios times discounted earnings expectations and consider peers and industry trends. But the basic drill without these extras is plenty powerful. Doing this will put you in control of your decisions and give you something other than panic and hearsay to go on. It won’t be perfect, but it will be good. And it will definitely be better than running around waiting for someone to tell you what to do every time the market gets in a tizzy. If you have cash and see bargains—use this same method to check on how good a deal they are. Good luck with your own stocks. I hope you’ll find you have lots of solid companies. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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