Being Friday the 13th, no doubt investors were thinking the last trading session of the week could be a big dud. However, traders who had awaited all week for the Labor Department’s Consumer Price Index report were happily surprised to see that benchmark had increased 0.6% in May — fast, but in line with expectations. Today also saw a decline in oil prices as the U.S. dollar gained ground against some foreign currencies. That put the lid on a week that showed promise if not for a 200-plus-point drop on Wednesday, precipitated by oil, inflation fears and the continuing saga surrounding financial stocks.
What’s the lesson of these past weeks? An old one, but worth repeating. Everyone knows the story of the three little pigs; The first little pig built his house with straw, only to see the wolf blow it down. The second pig built his house with sticks and suffered the same fate. The third pig took another approach, building his house with bricks. The big bad wolf huffed and puffed, but he couldn’t blow it down.
In these days of a brutal corporate finance environment, cash may well be the equivalent of bricks and morter. Companies generating plenty of cash are in the best position to withstand the huffing and puffing of a slowing economy. A healthy flow of cash, for example, has enabled Johnson & Johnson to boost its dividend 46 years in a row. It has also allowed IBM to buy back billions of dollars’ worth of its own shares year after year. Cash flow has given these companies and a select group of others the ability to invest in their businesses in both good times and bad.
A recent study of nearly 1,000 firms by consultant McKinsey & Co. found that those using cash in hard times for things like acquisitions and advertising, instead of just cutting costs, emerged much stronger from the 1990-91 recession. Indeed, the market valued these aggressive organizations almost 25 percent higher than their weaker rivals (based on the ratio of the stock price to book value). Strong cash flow allows companies to plow their money into “future talent, future technologies and future growth.”
Friday 13th isn’t always bad news for everyone. Ask the board of Johnson & Johnson, IBM, and even a global clothing and footwear company such as VF Corp. All three serve as excellent examples of enlightened management focusing on the core values of prospering in good times, and emerging from bad times even stronger than before.
These are old fashioned lessons, but then again, Friday 13th is an old fashioned superstition. Lessons last, superstitions are destined to die. Dear readers, you decide on which side of the fence you choose to sit.
