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Taking Stock

Tony Crowell

Market Rallies Are Not Sell Signals

Some investors remind me of animals that have been abused and now resist offers of kindness. A majority of investors surveyed in a recent CNBC poll reported that they mistrust stocks to some degree, as if they had been mistreated. This distrust continues despite stocks being up 65% in the last three years since President Obama took office.

Those surveyed considered stocks ranked third as an investment after real estate and gold; only 7% believe that this is a good time for investing in stocks. Those who began investing only in the last few years might well feel that way because their personal experiences left them feeling abused by the challenging stock market of the last ten years.

This is an understandable solipsism but disregards the superior long-range investment returns of stocks. Over the last 200 years, stocks returned an average of 6.5-7% annually, easily eclipsing real estate, gold and bonds. Over the last 10 years, stocks managed only a meager 1% annual return but the last 20 produced a 9% annual return, closer to their longer-range average.

These historical returns are certainly not forecasts of the market’s performance over the next year. They should help investors realize that the stock rally in the past few months is not an excuse to grasp short-term profits but, in all probability, signals a strengthening bull market, sending the market closer to its long-term returns.

There are certainly risks and always will be. The present dual problems of higher oil prices and lower home prices threaten the U.S. economic recovery. Europe has patched, but not fixed, the leaky pipes of its Euro Zone’s weaker members; their problems will continue to shadow ours.

Europe’s stalled recovery and irregular economic results in China make U.S. stocks comparatively attractive. Their appeal is enhanced by their moderate valuations and the business background here of very low interest rates and restrained inflation.

The financial sector continues to suffer from the hangover of its bubble years but well-run regional banks are gaining market share. I am continuing to add to our positions in U.S. Bancorp (USB-$31), which is growing earnings at double-digit rates, yet still trading at only 11 times estimated earnings. It recently increased its dividend by 56%. The yield is now 2.5% and this expanding bank has increased its dividend for 40 straight years.

Intel (INTC-$28), a leader in the elite technology sector, also trades at 11 times earnings despite double-digit growth and a 3% yield. With $54 billion sales and a widespread presence in all aspects of computing technology, it makes an easy target for lazy attention-seeking financial commentators, just as Apple attracts these Lilliputian critics. Both companies are great creators. Disraeli commented, “It is much easier to be critical than to be correct.”

U.S. Bancorp, Intel and, of course, Apple are solid supports for successful investing. IBM (IBM-$208) is another member of this club. Their recent upward price moves celebrate their achievements and confirm their inclusion in almost any stock portfolio in current markets.

Last year’s stock market was both volatile and trendless. The resulting investor uncertainties favored bonds, gold and consumer stocks like McDonalds. None of these is well suited for a market in an uptrend. With the economic growth rate continuing to inch upward, cyclical stocks will do well.

My cyclical recommendations include Chicago Bridge and Iron (CBI-$43), Cummins (CMI-$119), DuPont (DD-$52), Deere (DE-$80) and Sigma-Aldrich (SIAL-$73). The market’s uptrend has invited some customary selling pressure and new buys should be made, if possible, on market dips. That tactic also applies to Apple (AAPL-$610), which I hope to add at dips below $600.

 

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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