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Taking Stock

Tony Crowell

Quick Start for 2012

Stocks came out swinging at the opening bell of 2012. For a brief period, the market was not burdened with bad news from the bankers of Europe or the political candidates of America. As the holiday glow fades, we can expect the battering to resume as the bankers and politicians return to their daily grinding.

Anxieties overrode facts during 2011, pushing stock valuations into the bargain basement. Fourth quarter earnings reports will begin arriving in a couple of weeks and they will set the tone for the next month or so. Corporate earnings began a strong recovery after the financial crisis, reaching record overall levels last year.

Stock analysts recently became nervous with this persisting streak of improving results and took their forecasts down a few notches. Some shortfalls are thus already anticipated by market action and I expect that the actual results will encourage a firmer tone to stock prices.

News from Europe will continue to be discouraging as its financial leaders seem to have adopted policies of somehow muddling through from crisis to crisis. Their problems are becoming old news in American markets and forthcoming maneuvers from the various banks and agencies of the European Union will probably produce fewer shocks to our stock markets.

Fiscal strains within the EU may cause it to slide into recession. As a unit, it is the largest economy in the world and we share some of its problems. The U.S. is not sliding back into recession despite gloomy predictions and obstructionist political tactics. Leading economic indicators show our economy continuing weak growth, possibly boosted by recovering consumer spending and multifamily housing.

Japan’s economy will resume slow growth as it rebuilds while China and the rest of Asia continue to lead the global recovery. U.S. stock markets will remain volatile as political maneuvers grab the headlines. Investors may find some comfort in the history of stocks during Presidential election years. The average return since 1926 has been 11%.

Growing economies demand energy and seemingly inevitable problems with energy supplies also boost prices. Valuations are low and dividends rising for this essential sector and I recommend taking advantage of current values like Royal Dutch Shell RDS.A-$73. This aristocrat, founded in 1890, is the second-largest energy company, lagging Exxon by a small margin. It is growing faster, with sales at $455 billion of which 48% come from cleaner natural gas.

Earnings are keeping pace and will be around $8.40 a share for 2011, a remarkably low price: earnings ratio of 8.7. (Exxon’s ratio is 10.) Earnings growth is slowing but should still exceed $9.00 a share for 2012. Its dividend yield is an attractive 4.5%. The company operates in 90 countries and has a long history of success despite world wars and other disruptions.

Stock portfolios anchored with solid companies like Shell can afford a bit of spice from smaller companies. A sound record with good prospects is essential as with Spectrum Pharmaceuticals (SPPI-$14). Locally based in Irvine, this young biotech focuses on two oncological drugs that are already in commercial use. As a result, it differs from most companies in its sector by actually having earnings.

Earnings per share will be about a dollar for 2011, a nice contrast to the loss of a dollar in 2010. Future earnings growth will depend on the company’s success in bringing its drugs in late stage development to commercial-stage. It has $150 million cash and almost no debt so its prospects appear excellent.

So do the prospects of other growing companies, particularly the larger ones that can post higher dividends on the scoreboard. Manufacturing in America has quietly become a bright spot with two straight years of job growth after a dozen years of job losses in manufacturing. This helps balance reduced employment in service industries and government.

China dominates exports of inexpensive goods but the U.S. contends with Germany for leadership in machinery, chemicals and transportation equipment. Our export manufacturing industry remains vulnerable to weakness in Europe and to short sighted politicians who pimp for votes by demanding protectionist trade policies that threaten trade wars. Nevertheless, earnings within this sector should exceed forecasts.

Exporters in our portfolios include DuPont (DD-$47), General Electric (GE-$18), Intel (INTC-$25), 3M (MMM-$83), Robbins & Myers (RBN-$50) and Sigma-Aldrich (SIAL-$63). I expect a better year for all of these and, for that matter, for the stock market.

 

 

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 protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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