Tuesday, August 02, 2011

Wherefore Growth Art Thou?

The entire country has been laser focused on the debt ceiling crisis and the complete and utter failure of our political leaders to face up to their elected responsibilities.  IT is difficult to figure out which is worse.  There is perhaps a more worrisome matter at hand  -  lack of growth in our economy.

Recent earnings reports suggest that the economic recovery is uneven at best.  Some companies have produced earnings surprises, but most were only because analyst had set their sights much too low in the first place.  The June 2011 report from Ben Bernanke downgraded the Federal Reserve’s expectations for growth.  The Fed lowered its forecast for economic growth for 2011 to between 2.7% and 2.9%. At the last meeting of the FOMC in April, the Fed had projected growth for 2011 of between 3.1% and 3.3%. For 2012, the central bank forecast growth of between 3.3% and 3.7%, compared to its April projection for 2012 of 3.5% to 4.2%.

In my last post, I offered a counter cyclical idea  -  the food sector  -  as a place for investors to take a defensive position against a tough economy.  Consumers need to eat no matter what the economy is like, right?  They also need to drink water.

Consolidated Water Co., Ltd. (CWCO:  Nasdaq) is trading at the lowest multiple of forward earnings among a group of a dozen water utilities.  It’s forward earnings multiple of 4.4 times compares quite favorably to a multiple of 23.6 times trailing earnings.   The consensus estimate of $0.47 on $53 million in total suggests a dramatic change in fortunes for the company.  At last there is a golden nugget of growth.

Consolidated has long been a favorite on Wall Street, in part because it has an exotic business model.  Based in the Caribbean, the company uses reverse osmosis technology to produce fresh water from seawater.  The stock has commanded a strong premium since it went public several years ago.

Investors should inspect the CWCO nugget carefully just in case it turns out to be fool’s gold.  The company has missed the consensus earnings estimate in each of the last four quarters, suggesting that analysts are just a bit too optimistic about this company. 

Consolidated has established a brief but admirable record for paying dividends.  The current yield is 3.5%  -  decent compensation while waiting for the company to deliver the results analysts have projected.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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