How a Sinking Ship Provides Newfound Respect for Stock Market Beta

 

Miles out in the Atlantic Ocean, our ship started to sink.

It was a catamaran. The rental company didn’t properly secure the pontoon drain plugs. We were slowly taking on water the moment we sailed.

Because of air pockets, the catamaran only sank about three feet underwater. But even with wetsuits, the cold water was numbing.

Equally as unbelievable as the situation we found ourselves in, after a time, an empty cargo vessel sailed right by us. In a twist of fate, it happened to have a grapple arm. It picked up the catamaran and brought us home. It was a fortuitous experience.

Brunswick Corporation BC is a company you might be familiar with. It’s a big marine business selling many brands of boats (Bayliner, Meridian Yachts, Lowe Pontoons) and engines (Mercury, Mariner, Quicksilver). The company also sells fitness, bowling, and billiard gear.

As a business, the company’s been all over the place. On the stock market, the position has been the same—a trader’s dream for the ups and downs.

Earnings estimates for the company recently went up.

According to management, revenues in the first quarter of 2013 were led by outboard marine products and parts. Sales grew four percent to $995.3 million.

The company’s earnings grew 25% to $49.8 million. Adjusted diluted earnings from continuing operations grew 46% to $0.76 per share. The company reported that its first-quarter earnings results would have been better if not for cooler weather in important boating markets.

The company’s management forecast 2013 will produce sales growth between three and five percent. Adjusted earnings from continuing operations should be between $2.30 and $2.50 a share, up approximately 10%–20% from last year.

Investors need to be careful with this kind of stock, because when you’re dealing with luxury items or hobby gear, these stocks are the first to go when business conditions get tight.

A company like Harley-Davidson, Inc. HOG is still very much a successful operation, but because of the maturity of its marketplace, genuine growth in revenues and earnings is lackluster. (See “Key West: Paradise for Bikers And Consumer Spending.”)

A company like Brunswick is worth following, however, for the simple reason that its business conditions are a gauge on consumer spending in the marine market, as well as confidence in the U.S. economy.

Brunswick is a high-beta stock, and this is evidenced in its strong stock market moves, both up and down.

With decent earnings results, this position can move nicely higher. But predicting those earnings is difficult.

As I learned from the catamaran incident, it’s important to do your own inspection of any piece of equipment before operating. What transpired was an extraordinary combination of events and luck. In the stock market, this translates to research and an inspection of a company’s stock market beta before investing.