renaissance

Bad Forecasts Result in Stiff Penalties

Tony Crowell

By Tony Crowell

Last month, the government of Romania introduced a tax on fortunetellers.  The Romanian Parliament is now considering legislation that would subject them to fines or even prison if their predictions fail to come true. Investors may wish that the SEC would consider similar action against false stock market prophets.

I prefer assessing probabilities, a strategy that works well in war, poker and the stock market. These now indicate a continuing upward market for several reasons. Stocks have been gaining ground for several months and the market tends to observe Newton’s First Law of Motion, continuing in uniform motion until acted upon by an external force. Such forces occur all the time but the market’s calm reaction to the possibly unsettling major force of a revolution in Egypt indicates strong upside momentum.

The financial crisis of 2007-2008 spooked so many investors that overall attitudes seem skeptical, a good thing for the market. These prevailing doubts have kept valuations low as stock prices have courteously allowed resurgent company earnings to precede them. DuPont, for example, is steadily growing earnings at 12%, pays a 3% dividend and is trading at only 14 times earnings. Apple, my largest position, will grow earnings 50% this year, and trades at 15 times forecast 2011 earnings.

One of the major forces that impacts stock prices is the policy of the Federal Reserve. “Don’t fight the Fed,” is one of Wall Street’s more useful aphorisms. Congress has given the Fed two missions: stabilize the currency and promote employment. The unemployment rate is stuck at a sick 9%, so the dollar is being allowed to drift while the Fed pulls out all stops to provide liquidity and ease credit in order to induce a continuing business recovery.

These steps are working despite the usual naysayers as reflected in the latest round of quarterly earnings reports. Ultimately, higher inflation and interest rates will follow this increasingly vigorous business recovery but these familiar demons are still sometime away. I am anticipating this by reducing my interest rate sensitive issues such as Annaly Capital and adding industrial and technological stocks that are posting superior earnings.

Globe Specialty Metals (GSM-$21) is exemplary. It produces silicon metal and silicon alloys that have many industrial uses in chemicals, metals, autos, and photovoltaic cells. Sales are $552 million, up 13% in the last quarter, and 2011 earnings will be around $.75 a share, up over 75%, with similar growth forecast for 2012.

With the economic recovery getting traction, I am more inclined to welcome smaller company stocks and am also buying $172 million (sales) Sparton (SPA-$8). The company makes a variety of electromechanical devices for the medical, electronic manufacturing and defense sectors. Wall Street has overlooked this company, which is trading at less than 10 times earnings with recent results pointing toward greater gains.

Safeguard Scientifics is a favorite stock to invest in smaller companies with its positions in a dozen growth stage life sciences and tech companies. I am adding TICC Capital (TICC-$13). It provides capital to similar companies, emphasizing an income return. It currently yields over 7%.

Amtech Systems (ASYS-$25) is a new pick in the tech sector. It makes equipment for solar cell and semiconductor manufacturers. Sales are $158 million, growing at over 30%. 2011 earnings will be around $2.00, almost a double. Its stock dipped recently on exaggerated concerns about a future stock offering.

Finally, SeaDrill (SDRL-$36), an offshore oil drilling company based in Norway, has the world’s most modern drilling fleet. It also has a 7% yield. Market probabilities favor investors who add companies like these smaller ones.

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. (949)-494-1376/(800)-697-2622; www.crowellroberts.com

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