Round And Round The Numbers Grow
Stock market averages continue to hover above round numbers, without provoking the usual nervous selling. The popular Dow Jones Industrial Average has been above 13,000 since July with the broader S&P 500 staying above 1,400 and the more aggressive NASDAQ above 3,000. Round numbers attract attention and usually become popular subjects for babbling market commentators but they seem to be preoccupied with their repetitive stories about the financial crisis in Europe and major fiscal issues in this country.
These major topics are far from resolution but the flow of negative news has slowed recently, possibly due to the usual August vacation lulls. Several countries in the Euro Zone continue to slide toward recession but there are scattered signs of recovery here in the retail and housing sectors.
After five years, anxieties still persist among many investors as a result of the financial crisis. While stocks can always find some reason to surprise their owners, corporate earnings continue to increase and stock prices are up 80% since President Obama took office. The price: earnings ratio of the S&P 500 is around 16, near its historical average, with room to move further if the recovery continues.
The Federal Reserve is committed to using its resources to keep interest rates quite low in order to encourage a recovery with an accompanying boost in employment. This is an agonizingly slow process as fiscal problems here and in Europe make companies reluctant to expand hiring. Their nervous indecision has led to companies holding on to a record $1.7 trillion is cash. This is brutal to those seeking work but beneficial to stock investors as decreasing costs of corporate indebtedness aid increases in their earnings.
Investors will never lack an ample supply of blogs, columns, articles or newsletters that deal with generalities about the future (or lack thereof) of the stock market, the dollar, the economy or the nation. These are usually pessimistic, which I suspect makes them sell well, but the harder trick is to recommend specific actions and even harder to make them work. We have kept ahead of the market averages by emphasizing quality stocks with solid balance sheets, rising earnings and management that has steered clear of questionable behavior. During recent turbulence, I have continued to emphasize stocks in larger companies.
Bill Tilden, the great tennis player of the 1920’s, said, “Never change a winning game; always change a losing game.” This principle, which probably is how many voters will approach the November election, suggests continuing emphasis on big caps.
Careful weighing of reward versus risk remains a critical step. Investors often overlook this criterion by picking familiar household names, a weakness well known to mutual fund companies who use these reassuring names to peddle their funds. This misplaced reliance leads to investments in companies like Lehman Bros, Washington Mutual, Eastman Kodak and Xerox.
Perrigo Co. (PRGO-$109) is not a household name although its products are found in many homes. It develops, makes and distributes over-the-counter and generic prescription pharmaceuticals as well infant formulas and nutritional products. It is the largest producer of OTC pharmaceuticals for the store brand market.
Global sales from its recently concluded fiscal year were up 15% to a record $3.2 billion. Earnings per share were $4.99 and management forecasts an increase in fiscal 2013 to a range of $5.30 to $5.50. Yield is only 0.3% but the company has increased its dividend for eight straight years and another bump should come soon.
As demonstrated by the sticking power of the market averages above recent round number levels, investor confidence is rebuilding. That’s encouraging and it may not be too long before market soothsayers begin mumbling about 14,000 on the Dow. We’ll get there eventually and even at some point break through the 2007 peak of 14,165. Such progress should sound warnings at that time of possible excessive optimism. We’re not there yet but it is encouraging to see a less fearful attitude toward 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@example.com 949.494.1376/