Smart Investing

 

October 5, 2012

December 6, 2013


Taking a closer look at the latest unemployment figures

There was a surprise drop in the unemployment rate on Friday, which is statistically questionable, and part of the drop could be from a drop in the participation rate. I’ve talked in the past about how productivity has reduced the number of available jobs.

But have you ever thought about the participation rate?

The participation rate is calculated by taking the total number of employed persons over age 16 and the unemployed, and dividing it by the total population.

There are currently 12.5 million unemployed as of August and 142.1 million employed, which would give you a total work force of 154.6 million people. If we divide the labor force of 154.6 million by the population of 243.6 million, we get a participation rate of 63.5 percent. What does this mean, or why is it important?

From 1948 to 1978, the participation rate ran below that number, and there were no problems. The end of the 1990s did produce a higher participation rate of 67.1 percent, but that was also during the tech boom and many wanted to get in on the action.

From around 1950 to the end of the 1990s, women were entering the work force at higher numbers. After that, the rate begins to drop. Since 1950, the participation rate of men has been declining. There are potentially two reasons for this: First, as more women came into the market, the percentage of men would drop because of a bigger overall number. Second, many are baby boomers who have retired from the work force, and the Bureau of Labor Statistics also states that nearly 1 million men have fallen out of the work force because of disabilities.

One other interesting note I want to point out before giving you my conclusion — are you ready for this? According to the Bureau of Labor Statistics, one single effort per week of the following would establish someone as unemployed: visit a school employment center, checking union or professional registers, calling a friend or a relative about potential employment, or sending out one resume. Wow that’s easy.

So, while we have the big numbers on unemployment, we do have a higher percentage of the population looking for a job. It is easier to be counted as unemployed, and I won’t even talk about the underground, or cash and barter jobs. So when you look at those unemployment numbers, remember the above information and realize that maybe things aren’t so bad and this is why businesses are doing OK.

I received a question from Javier about his portfolio. He is frustrated because he has been day-trading over the last year and a half. He asked what I thought about holding Pandora (NYSE: P), Arena Pharmaceuticals (Nasdaq: ARNA) and FutureFuel Corp. (NYSE: FF) in the portfolio. He also wanted to know if Google (Nasdaq: GOOG) would split or not and if it is too late to get into Apple (Nasdaq: AAPL).

Javier, first off, stop day-trading. I know it can be fun and exciting like Vegas, but you won’t win in Vegas, nor will you win in day-trading.

Let's start with Pandora: I love listening to Pandora when I work out. It has a great music delivery service, but over the last 12 months the company has made no money and has seen earnings per share fall 54 percent. Looking out to January 2014, the mean of 19 analysts projects earnings of only 8 cents per share. Someday this company might make a lot of money, but I’m too chicken to hold a company with such low earnings and a long-term PEG ratio of 16.55.

Arena Pharmaceuticals: similar story here. No current earnings and even worse, the mean of nine analysts expects the company to lose another 15 cents for the year ending December 2013. While Pandora has no debt on its balance sheet, Arena carries a debt to equity of 70 percent. This may be one of those drug companies that makes some big hit on a blockbuster drug, but I don’t want to play the hope and pray game. I want a company with real earnings.

FutureFuel Corp., which engages in chemicals and bio-based products, has some potential. The company has a current PE of 13, no debt, a current ratio of 7.31, and has seen its earnings per share climb 36 percent year over year. Investors also get a 3.2 percent dividend, for which the company only uses 42 percent of its earnings to pay out. The only thing I don’t like is there is only one analyst who follows the company, so you're kind of on your own here, and must be really sure you understand the company.

With regard to Google’s split, it should happen this month. I have not heard anything negative about it, so I’m going to stick my neck out and say it will happen. Google currently trades just under a 16 multiple going forward, and while I like the company, I think it is a little pricey.

Apple is a little different, but not much. It's a great company, but based on current earnings estimates, I wouldn’t pay much more than $650 to $675 per share.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.



Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


 

October 5, 2012

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