Oil for Troubled Waters
American consumers have been unusually restrained over the past five years. The financial crisis shook complacency in reliable real estate investment. It destroyed many jobs, some gone forever. Computers are taking over many functions, boosting business “productivity” but leaving those displaced in the wake.
Manufacturing and medical companies are booming but the housing sector has yet to recover sustained momentum. This continues to infect the real estate lending industry, holding back mortgage-laden banks like Bank of America.
Consumer confidence is showing mild signs of recovery with the “Confidence Index” rising three points to 85, its highest level since 2008. After several years of reducing debts, consumer debt service levels at are their lowest levels in over 30 years.
Stocks have done well with the Dow Jones Industrial Average up more than two and a half times its level shortly after President Obama took office. Stockholders and others with higher incomes are benefitting. Tiffany, for example, has doubled in the last two years while Costco is up 25%, less than the overall market.
With our economy not firing on all cylinders, the pace of the recovery is restrained. Economists are lowering growth rate estimates after a negative first quarter. While that disappointment was doubtlessly largely attributable to a severe winter, an economic recovery that reverses with the weather is fragile.
The stock markets are trading at or near all-time highs, buoyed by strong earnings in the industrial, technology and advanced medical technology sectors. The environment continues to be quite favorable with low interest rates, low inflation and the Federal Reserve still providing stimulus, although at a slower rate.
Investors have not failed to notice these factors and stocks are trading at the higher range of valuations. Second quarter earnings will govern market action later this summer. Results meeting expectations would probably mean a stable market until fall when the September quarter will give new directions for the rest of the year.
Stronger stocks among recent recommendations include Shire (SHPG-$233). Celgene (CELG-$86 (after 2:1 split)), Illumina (ILMN-$170), Apple (AAPL-$90), Novo-Nordisk (NVO-$45), Intel (INTC-$30), Cummins (CMI-$154) and Union Pacific (UNP-$99. All are buys, particularly if market softness develops later this summer.
The energy sector was largely dormant earlier this year, coming to life as Mideast political crises increased. ConocoPhillips (COP-$85) remains my leading recommendation among the big internationals. It has a good record of positive earnings surprises and analysts have raised its June quarter estimate to $1.56 and for the full year to $6.45, both up more than 10%. Dividend yield is 3.2% with an increase last year and another expected this year.
Schlumberger (SLB-$115), the biggest oil service company was recommended here two weeks ago at $106. Its international presence supports its steady earnings growth around 15%. June quarter estimates look to $1.35 a share, with $5.68 seen for the full year. Its P/E is a little high but so is its growth.
Suncor Energy (SU-$42) is a new buy recommendation. This is a substantial Canadian company with revenues of $43 billion primarily focuses on development of oil sands in Alberta. Transportation remains an issue although expanded rail shipments and pipeline expansions in Canada are loosening bottlenecks. Moreover, Suncor still gets half its earnings from refining and marketing in its Petro Canada outlets.
June quarter estimates call for $1.01, up 60%, with the full year forecast at $3.90. That results in a very reasonable valuation for a timely recommendation that comes with a 2.2% yield, boosted for the last four years. Investors will be in good company, Mr. Buffett having bought 17 million shares for Berkshire Hathaway.
As usual, “the times they are a-changing.” This rattles many investors but the times will reward those who resist the siren calls of gold or bonds and stick with quality stocks in growing sectors.
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 1995. [email protected] 949.494.1376/800.697.2622