It’s pretty bleak out there, and rewards for risk taking are far and few between. Why speculate when in the immediate aftermath of doing so your position drops significantly in value?
It makes no sense, and that’s why some are saying the collapse in the market of late is due to a buyers strike. Investors are holding on very tight to hard earned cash before taking any kind of risk.
They will only do so when the potential reward compensates them for doing so. Or at a minimum, they can speculate when the margin for error on the downside is minimal. That’s why there is enormous interest in so-called defensive stocks. (See also: "Play Defense With Coca-Cola (KO)" and "Mosaic (MOS): More Than Just a Boring Defensive Stock?")
That being said, there might be another way to play the margin of error game. How about taking risk on companies whereby the future is more certain. After all, the big issue in the market is the concern about profits down the road, especially in a collapsing economy.
Are there companies out there that can deliver reliable earnings despite tough operating conditions? I’m not sure, but there are companies out there that have been doing so well that even cuts in forecast leave plenty of profit on the table for investors.
One such company is CSX Corp. (CSX). The $18 billion market cap railroad has been riding the winds of a powerful economy. Shipments of commodities from source to coast fueled huge revenue and profit gains for CSX.
The company has enjoyed an impressive period of growth, and given the contractual nature of its business, CSX can provide reliable guidance with respect to future performance.
Earlier this year the company raised its guidance for the year and stated that strong business would allow for profit growth in the 18 to 21% range. That is heady growth and provides a level of comfort for investors irrespective of the economy.
At the time of that guidance, CSX stated that it would earn $3.40 to $3.60. That was well above the Wall Street consensus of $3.05. Recently, the company did cut its third quarter guidance by $0.06 to $0.08 per share due to the hurricane season.
They did not reduce full year guidance. A few cents to the downside during a very real crisis that impacted the economy did not impact CSX’s full year performance. That’s what a margin of error does for you.
Like most stocks, CSX is dropping due to expectations of a severe slowdown in the economy. Shares have dropped to under $46 per share. At that level, you are buying the stock for 12 times 2008 estimated earnings.
Given that the company expects 2009 growth in the 18 to 21 percent range, investors have a cushion. At the end of the day if I can buy growth like this at a price well below the growth rate, I am all-in.
Shares may fall further given the negative sentiment in the market, but CSX does represent fantastic value in my opinion. If the economy does better than expected CSX should outperform the market.
That is a risk worth taking in my Rational opinion.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
