Sunday, March 8, 2009

How much is that doggie in the window?

Common stocks have fallen so far that the price of the stock doesn’t reflect the true value of the company. If the dividend is solid and in 4 payments you could get back all of your money something is terribly wrong. The market price of Microsoft is $15.28 for a total market value of $135 billion. What most people do not realize is that Microsoft has about $5.35 per share in cash and current assets. If we subtract the cash on hand then Microsoft is worth, based on market price under $10 a share.

I could fill pages of other stocks with similar large cash positions, but the market has seriously discounted the price of the stock. GE has a market price of $7.00 per share and has $4.56 per share in cash. Using the same approach as we used above with Microsoft if we take out the $4.56 per share in cash from the $7.00 price then GE is worth $2.44.

The point of these two examples is to show you how absurd the market pricing is at this moment in time. There is no order or reason in the markets at the moment. Do you realize that the price of GE is less than the price of a Whopper Value Meal at Burger King? The only opportunity with a Whopper is a larger waistline. Once you eat the Whopper it’s gone, at least with GE you have something that may make your wallet grow instead of your waistline. Nobody wants to buy at these prices because they think stock, cars and houses will get cheaper. You hear a lot of fund managers being quoted, “What is the rush to buy now, it will be cheaper later and then I’ll buy.” The problem with that thinking is that history has shown that they don’t buy till well after the market has recovered.

One thing is different this time around about waiting to buy stock. If you wait you have your money invested in cash or cash equivalent. In the past you were paid a reasonable return on that cash investment. The return on cash was not as good as the potential from stocks, but as a parking place while you were looking for something to buy the yields were okay--not so today. The yield on high a quality, Government money market funds is close to zero, if you can get your money invested. Many of the government money funds are closed to new investors. The yields in regular money funds are also falling, so you have little or no return putting your money in cash.

Every day that goes by where you are earning zero on your money makes it more and more difficult to reach a financial goal. There are only two ways that I know of to make money legally--you at work or your money at work. The practical reality is that if your investment account is down 50% - 60% you are going to have to work harder to generate more income to replace what you are down in the market. For most people working more to make up the shortfall isn’t an option.

The President recently said that his solutions will not solve our problems in days or months, but may take years. Some problems are more easily fixed than others Mr. President. The people are scared about what is happening in the economy. With the unemployment rate reported on Friday at 8.1% many people are asking themselves are they next to laid off?

We seem to want to focus on the negative of 8.1% of the work force that is unemployed and ignore the 91.9% of the work force that are working. In the same way we are ignoring the fundamentals of stock pricing and are letting emotions govern the day. Do you really believe that GE could go bankrupt? I could ask this same question of many other stocks so until people step up and ask, “How much is that stock in the window really worth, the one with all that cute cash on is balance sheet?” When we start to evaluate the value of a company based on what it does this market will no longer flounder.

Dan Perkins

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