Downplaying Doomsday

 | Mar 30, 2012 | 10:30 AM EDT  | Comments
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Leave it to fellow Real Money columnist Roger Arnold to throw a wet blanket on the party. As the markets continue their positive trajectory, and certain situational names in my portfolio and many others continue to play out positively, Roger had to remind us all yesterday about the potential realities on the horizon. I, for one, am glad he did. It's easy to focus on the positives in micro-land (your own portfolio) and lose sight of the macro picture. It's easy to succumb to what a former colleague of mine described as the cycle of greed and fear.

Roger painted an ugly picture of coming inflation and its long-term effects. I find it difficult to imagine a scenario where we will not be hit with a solid and recurring dose of this. The government printing presses have been on overdrive, our national debt continues to head skyward, and in order to keep the game going, to attract investors, yields have to head much higher. We'll just try and print our way out of it. Thanks, Roger, for the reminder. While it's fine to enjoy the current ride, we do need to be prepared.

Despite the potential long-term storm clouds on the horizon, I continue to see signs of life in some of the smaller discretionary names that I follow that suggest a pickup in economic activity. We've seen that with names such as Arctic Cat (ACAT), a member of my JIMS CRAB FEST portfolio for cheapskates, which has been putting up great numbers for the past year. We saw it with Blyth (BTH) two weeks ago.

Thursday, it was fine watchmaker Movado's (MOV) turn. The company announced a solid fourth quarter and a couple of surprises. Fourth-quarter revenue jumped more than 21% to $122.4 million, and the company bottom-lined $10.7 million, or $0.42 per share. While that included a tax benefit of $3 million, it was a vast improvement from last year's $31 million loss, which included several non-recurring items.

What's more, the balance sheet, which was already solid, got even better. Movado ended the year with $182.2 million, or about $7.21 per share, in cash, and no debt. This gives the company a lot of flexibility and allowed it to announce the surprises mentioned previously. For one, Movado will be paying a special cash dividend of $0.50 in May. For another, the company also increased its quarterly cash dividend 67% to $0.05. While that still makes for a tiny 0.82% indicated dividend yield, I like the signal that it sends: confidence. Guidance for 2013 suggests an 8% increase in sales, to the $500 million to $505 million range, and earnings per share of $1.10, implying a forward price-to-earnings ratio of 22. That's a bit rich for my blood. I've been out of this name since early January, after a nice gain. I did leave money on the table with this recent run, but that's par for the course. That often happens when a value name crosses back over into growth territory.

So how do we reconcile Roger's view of the coming inflationary storm (which I agree with), with the current rosier picture being telegraphed by the Movados of the world?

You don't have to reconcile them. You just need to be aware and not get lost in the euphoria. The point is that it's fine to enjoy near-term successes, but don't be blinded to what might be on the horizon. There are ways to prepare. There are assets we can own and assets we can avoid that can help mitigate the doomsday scenario.

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