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Taking Stock

Tony Crowell

The Beat Goes On

The market still has the wind at its back. For the first two months of 2012, the S&P 500 rang up a 9% gain, far ahead of its record for more than the last two years. It continues to outshine the Dow Jones Industrial average, a reverse from last year’s fearful markets when the blue-chip DJIA led.

Economic growth continues to build very slowly in this country. Europe still has its problems with Mediterranean economies that seem based on yogurt and pasta but the world’s leading economies from the Group of 20 are increasing their commitments to prevent further damage from the debt crises in the Euro Zone. All together, their efforts are building toward a $2 trillion war chest.

There will doubtlessly be setbacks and panicked “breaking news” but the momentum has shifted. Higher oil prices, brought on by tensions in the Middle East, are a threat to the recovery, with their impact aggravated by the charged political atmosphere of an election year.

As always, investors should try to stay the course, resisting the temptations to zigzag away from transient dangers. Investors have a great advantage over high-speed Wall Street trading desks. Their traders are highly motivated to try to scalp very short-term profits and investors should try to take advantage of the perspective available to them by taking a less frenzied view.

One effect of these trading desks has been a narrowing of the spreads on stocks. As I write, IBM is trading at 198.16 bid, 198.17 asked, about as small as you can get. National Oilwell Varco (NOV-$84), my newest oil services recommendation, is quoted at 84.07 bid, 84.12 asked. Actual trade executions may vary due to the continuing fluidity from large blocks trading quite rapidly. An easy solution in most cases is to use “limit” orders, such as a buy order for NOV at 84.07 or even 84.05.

That’s probably a good idea as NOV has been posting strong results for many years on a broad line of equipment, drills, tubes and other essential components for both land and offshore rigs. Sales and earnings are both growing recently at a 20% clip. Earnings for 2012 will be around $6.00 a share, up 24% as higher energy prices drive its sales. It even has a 0.5% yield.

As reflected on my website, www.crowellroberts.com, I have a continuing interest in seeing opportunities in developing economies. Unfortunately, the picture is often clouded through government control or interference, corruption and a lack of appropriate vehicles.

India’s HDFC Bank (HDB-$34) passes these hurdles. It commenced operations in 1995, following liberalization by India’s Reserve bank of the banking industry. It reported a 31% increase in earnings for the December quarter and I expect continued progress. There is a 3% yield and dividends have been increased for the past 9 years.

U.S. manufacturers are doing well and archetype Indiana-based Cummings (CMI-$121) is increasing sales of its diesel engines at a 35% rate. Earnings for 2012 should be slightly above $10 a share, up 15%. Its stock has enjoyed a good run but an improving economy leaves plenty of room for more.

Government control of companies in China is troubling but its growth cannot be overlooked. I am initiating positions in City Telecom (CTEL-$13), which provides telecommunication services including advanced Internet access in Hong Kong. Sales and earnings are growing at rates in low double-digits with earnings forecast to be $1.18 this year. It has a 5% dividend yield.

Some new technological picks next week. Meanwhile, Digital Realty (DLR-$73) offers a 4% yield from ownership of data centers and other technologically related real estate.

 

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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