Streetwise for Friday, August 4, 2017

Investors continue to be tortured by seemingly conflicting forecasts over the direction of the Federal Reserve, Wall Street and the economy. If it will put your mind at ease, I will state unequivocally that no one can predict the future with any degree of accuracy.

Moreover, you do not need esoteric conjectures to know the economy is expanding, or that the earnings of companies making up the S&P 500 index have likely increased by 10.8 percent on average in the second quarter.

No, Wall Street is not an express elevator to riches and there will always be somebody trying to push a button for a lower floor. You know, the one where products such as annuities will be like the Sirens in Greek mythology, luring you with enchanting forecasts only to have your portfolio crash on the rocky shoals of poor returns.

If you are tempted by what others are proselytizing, consider that the most comprehensive study on the topic of forecasting was conducted by Philip Tetlock. In his book “Expert Political Judgment,” he describes a study of 28,000 forecasts that were made by hundreds of experts in a variety of different fields.

According to Tetlock, not only was the performance of human forecasters distressingly closer to that of a chimpanzee, it was impossible to find any domain in which humans outperformed crude extrapolation algorithms, much less sophisticated statistical models.

A similar study was conducted of investment forecasts. The CXO Advisory Group gathered 6,582 predictions from 68 investment gurus made between 1998 and 2012. The average accuracy was 47 percent, a number that was worse than flipping a coin. Of the 68 gurus, 42 had achieved accuracy scores below 50 percent.

Do not let prognosticators be the driving force behind your investment decisions. Do your own research. For example, machinery stocks have been strong performers since the beginning of second-quarter with the sector up about 10.55 percent. Industrial production grew at an annual rate of 4.7 percent during that period and new orders for machinery increased 4.6 percent in the first five months of 2017.

One candidate in this sector might be Illinois Tool Works (ITW). The company manufactures and sells industrial products and equipment in seven key areas: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.

Second quarter revenues increased five percent with organic growth up about half that amount. The company’s auto sector was the strongest with organic growth of 4.4 percent and a contribution of almost 23 percent to overall revenue. Management did forecast weaker results in the second half due to autos contracting.

Food equipment revenue rose less than one percent, while test & measurement rose more than four percent. Welding was up more than three percent, with seven percent growth in equipment offsetting two percent contraction in consumables. Polymers and fluids were down one percent, construction was up a little less than two percent, and specialty was up close to four percent.

On an organic basis, all but one segment saw operating profitability improve from last year, a compliment to ITW’s ongoing execution capabilities and operating leverage.

Looking ahead, the company’s projections call for earnings per share of $1.57 to $1.67 and for fiscal 2017, earnings per share of between $6.32 and $6.52 with organic revenue growth of 2 to 4 percent.

The intrinsic value of the shares using the conservative free cash flow to the firm model produces an intrinsic value of $170 per share. My earnings estimate for this fiscal year is $6.40 per share with a 12-month projected share price of $155, yielding a 10 percent capital gain, plus there is an indicated dividend of 1.85 percent.

Note to readers – Save the Date – Rudd International is sponsoring an open house in support of Southeastern Guide Dogs, a non-profit, 5 to 7 PM on Tuesday, August 15. All are welcome. Donations not required. Please RSVP 706-3449.

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