I'm not one to make predictions, but I'll give it a go: The stock market may end the week on a good note; in fact, it could end the year on a solid note.
How does this potential outcome affect my investment activities going forward?
Despite a jobs report this morning that confirmed the dismal state of U.S. employment prospects, the market was up earlier today thanks to what U.S. Treasury Secretary Tim Geithner called a "substantial" jobs package that's expected to be unveiled by President Obama tonight. On top of that, the market is supported by the assumption (or expectation) that the Federal Reserve will institute a third round of monetary stimulus to bolster the economy.
The reality is that market investors are trying to time their decisions based on a couple of events with no knowledge of how beneficial or effective those events will be.
No doubt, a clear and effective plan to add jobs is a good thing, and something the economy desperately needs right now. But I scratch my head when I see investors buying equities this week -- many of them are the same investors who were selling three weeks ago at much lower prices.
For instance, South Korean steel giant POSCO (PKX), one of the best-managed and profitable steel companies in the world, was trading in the mid $80s, or 7x earnings, at the peak of the market turmoil last month yet no one seemed to care. Now folks are buying it at $99, which is still an attractive valuation at 8x earnings.
Investors are likely to maximize results if they forego trying to time market events and instead focus on pricing businesses, as the operations of a business are not as volatile as the stock market. Oshkosh Corp. (OSK) is a quality business with an excellent array of diverse operations, but uncertainty surrounding defense spending has hurt the stock price. Long-term operations, however, are resilient. Pricewise, shares trade for $18.27, less than 5x trailing earnings and 10x forward earnings. The company sports an enterprise value of $2.4 billion. Over the past four years, free cash flow has been as low as $300 million and as high as $852 million.
Solutia (SOA) is a specialty chemicals manufacturer with leading market shares in all three segments of its business. Specialty chemicals are far from glamorous but they are often essential ingredients in many day-to-day products. Priced at $16 a share, the company trades for 8.8x earnings with expectations of strong growth ahead. In fact, estimates are for earning per share of $2.45 in 2012, up from $2.12 in 2011.
Arrow Electronics (ARW) is a global distributor of electronic components to industrial and commercial customers. Macro concerns have led shares to fall by more than 30% since May. Now the shares trade for $30, valuing the company at less than 6x forward earnings, despite estimates that earnings will grow by 25% in 2011 over 2010.
The above examples merely illustrate the possible opportunities that exist for investors who let price guide their investment decisions rather than relying on what type of stimulus or other temporary measures will boost stock prices.
Sure, cheap stocks can get cheaper, but when you buy well below intrinsic value, odds are that good things will happen.