Testing, Testing: One, Two Three
Stocks continue in an uptrend. We can expect such trends to be tested at anytime with dips or even larger “corrections,” for almost any reason. Such momentary setbacks are inherent in the nature of active markets and investors should avoid nervous selling so long as the current stock market’s three underpinnings remain intact.
Low interest rates, rising earnings and moderate stock valuations make up this troika. As long as these are in place, the market’s trend will survive breaking news events such as the inevitable difficulties in restructuring the Euro Zone’s economies. The financial media depend on attracting investor interest to their frantic clamorings but investors should resist the emotional temptations to react to news events.
These will be aggravated until the November elections are behind us. National political campaigns always generate more heat than light on economic issues although the current one is unusual in blaming all stresses stemming from a global economy such as rising oil prices on the Administration.
Highly visible rising gas prices threaten consumer confidence. House prices continue in the opposite direction, adding another concern. Oil prices are currently reacting to supply concerns from tensions in the Middle East. These show some signs of peaking as coordinated sanctions take effect but these efforts, like dealing with Europe’s deep seated fiscal problems, will need time.
Investors remain skeptical, even fearful, with scars still visible from the 2007-2008 financial debacle. This pessimism helps provide a menu of attractive values such as Simon Property Group (SPG-$136). This leading shopping center REIT proved its management skills in keeping cash flow positive during the dark days of the recent crises.
Earnings are growing steadily and it offers a 2.6% yield, which will undoubtedly improve with its earnings. It is the largest real estate company in the U.S. with an increasing presence in Asia. Sales are over $4 billion; occupancy is up slightly to 95% and sales per square foot up 10% to $536.
That’s a tenth of the sales per square foot of Apple’s stores but Apple leads the world in that category, among others. The debut of its new iPad drew the usual headline-hunting critics; my favorite was the fellow who thought the higher resolution of its new screen might be too sharp for video conferencing. If it is too sharp for users, I’m sure there’s someone in a garage somewhere developing an “app” to enhance their appearances.
News events and their misinterpretations often produce short-term market reactions that enhance opportunities for those with longer perspectives. Simon Property, for example, backed off a couple of points on news of its issuing stock to take a major stake in a European shopping center operator. Reading beyond the headlines of this $2 billion deal reveals that it will actually increase Simon’s cash flow this year.
The continuing market uptrend encouraged new positions in some smaller companies: Allot Communications (ALLT-$17) competes with much larger Cisco in enhancing broadband Internet traffic management. It is growing much faster with a 37% sales increase in 2011 and earnings tripling.
Centel Medical (CMN-$21) makes infection control products and fluid purification systems for medical, biotech, beverage and industrial markets. It surprised Wall Street by beating forecasts with a 28% increase in earnings on a 20% increase in sales for its latest fiscal (January) quarter. Earnings for its full year ending in July should break a dollar a share, up over 20%, a reasonable valuation for sustainable growth.
Major trends continue to keep the market on course. Investors should take advantage of dips that test their nerves by adding to positions in quality growing companies like these.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. email@example.com 949.494.1376/