Don't Invest Like SpongeBob SquarePants

Maybe he never wanted to live in an undersea pineapple.

Cartoon sensation SpongeBob SquarePants is the quintessential optimist … to a fault. He has likely blocked all memory of that time he made a killing in the stock market and lived in a plush (flooded) Manhattan penthouse.

Alas, when the market went sour, SpongeBob's optimism got the better of him. He trusted the politicians who spoke of recovery, and he heeded the experts who counseled patience and adherence to time-tested strategies.

Did I mention that he ended up living in a pineapple at the bottom of the ocean?

Keep your feet on dry ground
Optimism is a glorious building block of the American spirit, and given the challenges ahead, we require positivity like never before. Like any human virtue, however, optimism can quickly become a vice when taken to extremes. When critical facts must be ignored to maintain an outlook, or dissenting perspectives vilified to protect a mindset, I consider these warning signs that irrational exuberance remains.

Stocks rode a tidal wave of optimism Thursday. Buoyed by solid earnings from key blue chips Caterpillar (NYSE: CAT  ) and 3M (NYSE: MMM  ) , the Dow leapt 200 points in a parade of newfound positivity. On days like that, I find that countervailing messages of caution or concern are met by particularly vehement opposition. As a prime example, let's consider some of the reaction to Nucor's (NYSE: NUE  ) earnings release. First, we need to see what Nucor had to say.

Nucor's second quarter numbers were quite fine on the surface: Quarterly profit of $0.29 per share marked a 190% sequential improvement from the first quarter. Net sales rose 15% sequentially to reach $4.2 billion, and the market for finished products that had presented such weakness in recent quarters bounced back with a 25% sequential boost to shipments.

Sure, it's tempting to glance at these numbers and continue building a presumption of continuing recovery, but consolidated shipments rose only 1% from the first quarter. Nucor's capacity utilization actually reversed direction, slipping from 73% to 71%. Providing context for these less reassuring comparable data, CEO Dan DiMicco states:

There is a general slowdown taking place across all product lines as the overall economy has entered into a new period of uncertainty.  This is the case both in the U.S. and globally.  The most challenging markets for our products continue to be those associated with residential and non-residential construction, which continue to show little, if any, strength.

During the conference call, he offered more of the straight-talking, empirically driven commentary that has made him a reliable source for realistic economic perspective:

Looking at current economic conditions, a long, slow recovery in demand that we expected is unfortunately the reality our country faces today. And there are also legitimate concerns about the possibility of a double-dip recession, or at minimum a significant slowing of growth.

Don't fear the backlash
It takes a certain bravery to be the bearer of bad news when no one wants to hear it.

One industry analyst attempted to downplay the sobering commentary by characterizing Nucor as consistently excessive with its "bearish" outlook.

In point of fact, I think it is entirely clear by now that what Mr. DiMicco predicted would be the "granddaddy of all jobless recoveries" has played out before our eyes. Despite copious injections of supposed stimulus, U-6 unemployment ultimately remained frozen at 16.5% between June 2009 and June 2010.

The same analyst also suggested that Reliance Steel & Aluminum (NYSE: RS  ) "has a better feel for real demand" than Nucor. Not surprisingly, Reliance offered a more reassuring economic outlook than did Nucor.

Here again, I have documented Nucor's invaluable role in helping investors make crucial distinctions between the inventory restocking phase that lifted the steel industry from its darkest days, and identifiable recovery in end-user demand. Further insights from competitor Commercial Metals (NYSE: CMC  ) recently pointed to public spending as an emerging source of demand. Indeed, my recent reviews of earnings from POSCO (NYSE: PKX  ) and Steel Dynamics (Nasdaq: STLD  ) prove that each steelmaker contributes important pieces to a dynamic understanding of this bellwether sector.

Choose your heroes carefully
Perhaps it's easier to ignore troubling observations about the state of the economy if one can label the messenger. One writer recently sought to cast Nucor as the Eeyore of the corporate world, referring to the endearing yet depressing character from Winnie the Pooh. The article claims: "Nucor once again introduced its own bit of worry and gloominess into the proceedings, like Eeyore."

Hogwash! It's far too easy to cast anyone with an unattractive message as a doom-and-gloomer or other such label that permits us to conveniently cast their ideas aside. The inconvenient truth, however, is that ignoring observations or ideas simply because they are unsettling is a surefire recipe for an excessive optimism that dangerously severs links with reality.

Actions speak louder than words
Rather than rushing to spurious mischaracterizations, if one were to actually take the time to consider DiMicco's ideas on the merits, one might actually discover the immutable optimism and patriotism that underlies his commitment to a better tomorrow.

In a series of advertisements and editorials, Nucor and its outspoken CEO have laid out their vision for a return to American prosperity. The key underlying premise is that sustainable growth will require a change in direction and economic policy. One such ad noted: "At Nucor, we are committed to recapturing American independence […] by reversing the deficit-driven trends that currently define our nation's economic policy." Now, there is some change we can believe in!

Specifically, Nucor is pressing for efforts to achieve energy independence, balance our trade deficit, rebuild American infrastructure, and restore the nation's critical industrial base. DiMicco takes his role in addressing these challenges seriously. He writes:

This is our crisis, our challenge, and our responsibility. We are being called to address and succeed at resolving this economic crisis. Make no mistake about it, we must embrace this opportunity in order to change our direction as a country for the betterment of current and future generations of Americans and, as a result, the rest of the world.

Quite the opposite of an Eeyore, I would be more inclined to liken a Nucor, its management, and its loyal "teammates" -- since they courageously confront the generational challenges faced by their nation -- to an entirely different sort of iconic character. For their persistence, realistic optimism, and unquestionable patriotism, I think Captain America would fit the bill.

So, don't be a SpongeBob SquarePants, and listen to Captain America.

Nucor CEO Dan DiMicco is a registered Fool. Join him and thousands of insightful investors in Motley Fool CAPS, where all ideas -- gloomy or uplifting -- are considered on the merits. Nearly 2,000 of those Fools have selected Nucor to outperform the S&P 500. How will you vote?

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Nucor. The Motley Fool has a stainless disclosure policy.


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