On The Bargain Counter
The stock market managed to work itself back into an uptrend with volume rising on consecutive up days. No sooner had it achieved this short-term reversal of May’s “correction” than a 200-point down day put its new uptrend under pressure. As economic developments here and in Europe have not produced any dramatic news, these short-term fluctuations are inherent in the market’s daily struggles between fear and greed.
The resulting equilibrium between the parade of unsettling news events and the remarkably reasonable valuations on most stocks will probably keep us in the trading range I mentioned last week. Stocks may bounce between 12,000 and 13,000 on the Dow Industrials for the rest of the summer. Bank failures in Europe could probably prompt a downside breakdown while continuing slow economic recovery in the U.S. and abatement of its political wrangling should prompt an upside breakout by yearend.
Blue chip stocks bounce with the rest of the pack but usually end up at higher levels. With the media seeking investor attention through competing shrillness, the generous supply of ever changing financial news will keep investor nerves on edge. That’s one good reason to emphasize stocks in large, growing companies, as fearful investors will eventually dump unproven stocks for the big boys. Another reason is the unusually large spread between dividend yields and the record low rates from investments that might seem “safe” but are destined for below average returns.
These underachievers include long-term bonds, gold and collectibles. Interest rates will eventually start easing up, damaging bond prices. Inflation, the traditional partner for rising gold and collectible values, is taking a nap.
Apple (AAPL-$580) is the poster stock for the overachievers. Its new dividend gives it a 1.8% yield, the same as a 10-year Treasury bond. It is quite likely to increase its payments as the years roll by, something that a bond will never do. Other winners include Intel (INTC-$27), IBM (IBM-$194) and General Electric (GE-$19), each up more than 10% in this year’s challenging markets.
There are successful stocks outside the blue chip arena like SolarWinds (SWI-$44) but I prefer to emphasize more seasoned companies with dividends to pour on troubled waters. Corning (GLW-$13) is certainly seasoned, having rolled out its first glass in 1851. It is the world leader in glass technology, most famous recently for “Gorilla” glass, used in smart phones and tablets. Its new “Willow” glass is strong, thin and so flexible that it can be wrapped around a device or structure like paper. Applications for displays, seals, large area solar cells and touch sensors promise remarkable growth.
The company’s earnings dipped with recessionary profit margin pressures on products like television screens but sales continued to grow at 19% annually to $8 billion. Analysts project 2012 earnings at $1.35 a share and 2013 in excess of $1.50. It increased its dividend last year and yields 2%.
Banks remain a much-publicized sector, dramatized by the swaggering of Jamie Dimon, CEO of Morgan Chase, before Congress. US Bancorp (USB-$31), a well-run regional bank remains my only buy recommendation in this sector. Money center banks are coming back from their near-death experiences and I am adding the much-battered Citigroup (C-$28) to my watch list. It needs more time for healing but, unlike its louder brothers, it has returned to the old fashioned banking business of soliciting deposits and making loans. Earnings for 2012 will be around $4.10, up 13% with similar growth seen in 2013.
That’s quite reasonable as are the valuations for all the stocks mentioned here. Selecting stocks on value rather than headline news requires patience and discipline but can be quite rewarding. Today’s anxiety-driven markets provide a playing field that will be looked back upon sometime as a unique period to acquire marked down growth stocks on the bargain counter.
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/