Our so-called junk rally has been unusually kind to the
market's weakest links, with the likes of
Ford (NYSE: F),
Las Vegas Sands (NYSE: LVS), and
Palm (Nasdaq: PALM), for example, sporting
triple-digit returns on the year.
Never mind the sorry state of their financial "health." A
deeply bought-into belief that happy days are here again has
led to yet another spiked punch bowl -- and with the
lampshade only recently fastened back on the lamp and the
glass-cleaner barely dry on the copy machine, too.
Party on, Wayne
Yes indeed: The market is drunk yet again. How else to
explain the rise of the aforementioned powerless trio? Each
hemorrhaged cash during its past fiscal year and all trade at
more than 25 times the rosy next-year earnings scenarios of
Wall Street's eternally optimistic, Gucci loafer set --
25 times!
The you-can't-be-serious shoe also fits
Sirius XM Radio (Nasdaq: SIRI) -- another
triple-digit gainer on the year despite its 0-for-10 free
cash flow record over the
past decade-- as well as
Freeport-McMoRan Copper &
Gold (NYSE: FCX), an
admittedly sturdy operator, but one whose fortunes (or
misfortunes, as the case may be) are tethered to the
mercurial demand for commodities. Not for nothing did
Freeport's operating margins shrink by more than 100% during
fiscal 2009.
What goes up ...
Investors have nonetheless bid up Freeport's stock
price by some 150% on the year, a trajectory that underscores
my point: All these concerns should concern any investor who
holds their shares.
Here's why. Parties are fun while they last, but no one
Fool should be the last to leave. Investing ain't Sunday
school, it's true, but fundamentals (and, um, fundamentalist
investors) will eventually trump a "technical" rally, a rise
powered in large measure by the fact that money has begun
flowing back into equity mutual funds and that money managers
don't get paid to sit on cash.
To snip the title from a favorite Fool commentary, the
bottom line is this: Danger, horror, get out. Unlike that
must-read write-up, though, no irony is required here. Now
really
isa great time to cash out of clunkers and trade up
to tougher stuff, vehicles poised to provide greater mileage
over the long haul.
Two for the road
Intel (NYSE: INTC), for example, is still
trading below its yearly high despite impressive
year-over-year growth in operating income during a tough
fiscal 2008. Like Intel,
Apple (Nasdaq: AAPL) boasts a rock-solid
financial profile as well as a fat and happy figure when it
comes to return on equity (ROE) -- a key indicator of both
profitability and the managerial acumen of the companies'
honchos.
Art and science
No matter what data swirls around it, though, free cash
flow (FCF) is my mainstay metric. Add up the cash a company
has taken in from operations, subtract its capital
expenditures, and
voila: FCF, the lifeblood of any going concern that
aims to
remaina going concern.
The science of analyzing FCF involves assessing the
present value of a company's future cash flows. And then the
art kicks in; determining whether a stock's current price is
right in light of the return you require given its risk and
how wide your margin of safety must be. Continued... |