By Sasha Cekerevac for Daily Gains Letter
This is the correct question to ask, rather than asking simply which stock(s) to buy. To be successful over the long term, you need to have a comprehensive investment strategy that takes into account your goals and risk parameters.
Having said all of that, at the end of the day, I’m looking for a company that has both an attractive valuation and the ability to increase corporate earnings at a rate above market expectations.
One way to develop an investment strategy is to look at the factors driving corporate earnings for a specific industry and individual company.
A great example is the automotive sector and Honda Motor Co., Ltd. (NYSE/HMC). Based in Japan, Honda actually has several different segments that they sell into, with automotives being their most commonly known products sold worldwide.
Chart courtesy of www.StockCharts.com
Why do I think corporate earnings will continue rising at Honda, and what factors am I considering when looking at this stock as part of an investment strategy?
Looking at the automotive industry here in America, sales are obviously soaring now compared to what we’ve seen over the past few years. Is there any real sign that this will change anytime soon? I don’t believe so, and I think cheap financing will continue for some time.
Globally, car sales will continue to increase as many nations around the world are keeping interest rates low, creating cheap financing.
Another reason I believe Honda will continue to rise is the policies stemming from the Bank of Japan and the government of Japan. For those unaware, the Bank of Japan is undergoing a massive monetary policy program (money printing) with the blessing of the Prime Minister of Japan.
Leaders in Japan are explicitly stating they want a significantly lower Japanese yen to drive exports. The lower the yen goes, the higher the corporate earnings are for a company like Honda, which benefits from this currency conversion.
This type of fundamental driver is important for any long-term investment strategy. Having the Bank of Japan forcefully trying to drive the yen lower is just another factor supporting strong corporate earnings for an exporter like Honda.
Just take a look at the second-quarter 2013 results and you’ll see the strength in Honda’s corporate earnings, and how this investment strategy is playing out. During the second quarter, consolidated corporate earnings were up 46.4% compared to the second quarter in 2012. (Source: “Honda Motor Co. Ltd. reports consolidated financial results for the fiscal second quarter ended September 30, 2013,” Honda Motor Co., Ltd. web site, October 30, 2013.)
Honda’s automobile revenues increased 26.2% year-over-year and motorcycle revenues were up 35.0% year-over-year. While the firm did incur some added costs, overall corporate earnings increased due to higher sales volume and positive currency effects (i.e. a weak yen).
When considering this as a long-term investment strategy, are any of these fundamental drivers going to change over the short term?
I don’t believe so; in fact, as the Federal Reserve begins reducing monetary stimulus, this will help the money printing in Japan to further weaken the yen, which will, in turn, help the corporate earnings of exporters like Honda.
I’m not suggesting you should simply buy the stock right now; rather, I’m giving you an idea of how to structure an investment strategy that looks for corporate earnings growth by including various factors. When you’re examining your stocks, try to look beyond the current environment to see if the landscape is improving or worsening for the companies in your portfolio.