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Taking Stock

Tony Crowell

Dow 15,000?

Halfway through the first quarter of 2012 and stocks are up 6%! That’s far better than last year when the S&P 500 was totally flat after four full quarters. Eight quarters since 2009 only bumped it to 1%. Despite over-publicized anxieties with political resistance and obstacles in some sectors, the economy has continued to make a weak but improving recovery.

In an environment of record low interest rates, which the Federal Reserve has now pledged to maintain until 2014, dividend-paying stocks are preferred investments. Corporate earnings continue to surge from the depressed levels accompanying the financial panic, keeping overall stock valuations in a reasonable range.

Jeremy Siegel, author of Stocks for the Long Run, and a perennial bull on stocks, believes the recent rally is not only overdue but still has lots of upside potential. His studies of market cycles suggest a pattern of two-year cycles of better-than-average returns following five-year cycles of worse-than-average returns.

The last five-year period certainly qualifies as a (much) worse-than-average cycle with a negative 11% return for the entire period. In such periods, Professor Siegel’s studies point to a rebounding return over the next two years of 20%. While market commentators currently babble about the Dow Average heading next for 13,000, he feels that the next two years have a two-thirds probability of this historic average making a new high above 15,000.

The real world sometimes defies statistics, as any poker player could attest, not to mention the statistician who drowned crossing a river with a median depth of three feet. The winds are favorable but there are always rocks and shoals. I am thus continuing to emphasize well financed, growing companies, particularly those with an extra edge for investors like Abbott Labs (ABT-$56).

This Chicago-based company has grown to almost $40 billion sales during its 120-year history. Sales include an extremely broad range of healthcare products ranging from advanced pharmaceuticals and cardiac stents to baby food, laser vision technologies and veterinary products. Last year, Abbott announced it would split the company into two parts, the pharmaceutical division with its research capabilities and the non-pharmaceutical parts, which may provide steadier growth.

While quite a few corporate mergers and acquisitions fail to work out as planned, spin-offs like Abbott’s have a promising history of the sum of the parts trading for more than the parent. Its stock has risen in line with the general market and still trades at only 11 times forecast 2012 earnings. Abbott pays a 3.5% dividend with increasing payments for 39 [!] years and I expect it to continue to reward its shareholders.

Michael Kors (KORS-$42) has little in common with Abbott. This self-styled “jet set” fashion brand went public only a few months ago and shot up 24% in price on Valentine’s Day when its first public earnings report blew out analyst forecasts. I won’t mention the price: earnings ratio but that will moderate as it executes its plans to expand to a target of 400 stores in North America, double today’s level. Its sales are a sixth of Ralph Lauren’s but growing faster.

Also catering to demanding tastes but at lower price levels, TJX (TJX-$35), operator of T.J.Maxx stores and other lines, is trading at a reasonable valuation of its growing $23 billion sales. Its P/E ratio for the year ending 1/29/12 is 19 and forecast earnings take that down to a moderate 15.

TJX pays a 1% dividend, Apple (AAPL-$504), the world’s most valuable company, doesn’t pay anything although it easily could. I’m still buying it, trying for dips below $500, with the expectation that two years with a favorable market will take it to $1,000.

 

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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