So you're sitting on the sidelines waiting for a sign that the markets are safe for reasonable speculation. What are you looking for? Do you want to see a bull market return before committing capital? Are you waiting for signs that the economy is turning the corner? How about corporate earnings improvement?
In the near term I expect to see more and more of the proverbial corporate buybacks. As such, I suggest investors use that event as a signal on individual equity securities. The power of these validations of value can be stunning.
After the market closed on Wednesday, basic materials company, Walter Industries (NYSE: WLT), announced that it would be expanding its stock buyback program by $50 million. On the surface, such amount is a small fraction of the more than $1 billion of market value outstanding, but the move is more than symbolic.
Essentially, management is taking advantage of ridiculously low levels in its stock price. For those looking to establish a position, such a move is a great endorsement of the company and its future.
It has been a rough road for Walter during the last year. For the first half of 2008, the stock was on fire, as coal companies benefited from rising oil prices and the search for alternative energy. When oil prices collapsed so, too, did shares of WLT.
The final coup de grace came in November. The credit crisis and global recession talk resulted in forced selling and fearful liquidation. A stock that started the year at just under $40 per share shot up to more than $100 only to hit bottom at $11.12.
Buying at the lows would have required a strong stomach and nerves of steel. That said, doing so would have resulted in big gains as the stock bounced to $17.52 as of the close on Wednesday.
Now we get the increase in the buyback program and wow. The stock was up more than 20% Friday, trading up to nearly $21 per share. Is it time to jump on board?
It is never fun buying a stock after it has moved up so smartly, but in this case there is still meat on the bone. From a fundamental valuation standpoint, shares look attractive -- hence management's decision to buy more stock. Shares trade for just eight times trailing earnings and three times forward earnings. That is a wild disparity that allows investors to buy growth at a very cheap price.
At the moment, analysts expect 2008 earnings of $4.69 per share and a whopping $7.27 per share in 2009. If you believe that the economy will strengthen, WLT should have no trouble meeting these estimates. Even after the gains there is still more upside in my opinion.
Louis Navellier's PortfolioGrader Pro, which offers free ratings for nearly 5,000 Wall Street stocks, rates WLT a B, or Buy.
Jamie Dlugosch is a contributor to NavellierGrowth.com.
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