Taking Stock

Tony Crowell

Facebook Or Apple?

Quality counts. This is true in most things, including the stock market. The difference is clearly shown in the recent performance of Apple and Facebook. Apple set record new highs while Facebook slumped, becoming one of the least successful initial public offerings in recent memory. Its problem is that Facebook lacks a basic business model for making money and went public on hyped public relations built around the alleged genius of its 28-year old CEO.

Mark Zuckerberg is no Steve Jobs and Facebook may founder like the horde of brand new dot.com companies that flourished briefly during the Internet bubble of 1995-2000. Some social media companies will survive but the glamour is gone from their stocks. With stocks like Apple available, I see little attraction to a crowded field that already includes Linkedin, MySpace, foursquare, Groupon, Renren, FriendFinder, Yelp, Zynga, Pandora, HomeAway, Demand Media, and Yandex, among others, most of which are selling below their IPO prices.

The network effect enables dramatic growth in the users of these media but most have failed to translate this into sustained profitable business models. Even those that survive may become stagnant investments, as was the case in Yahoo, AOL, Research in Motion and Netflix. Alexander Pope gave good investment advice in 1711, “Be not the first by whom the new are tried, Nor yet the last to lay the old aside.”

The media continue to solicit investor attention through predictions on market direction. I continue to recommend that these Ouija board tactics be replaced by careful selection of quality stocks. Apple, the largest position in the portfolios I manage, is the prime example. I increased positions earlier this year after its new dividend actions made it even more attractive, particularly for retirement accounts.

Most investors underrate the power of dividends to increase investment returns. One reason is that the media on which they seem to rely often ignores dividends in reporting stock returns; it is easy to calculate the raw return on a stock index but adjusting for dividends takes time and effort.

The longer the investment period, the more dramatic the results. Robert Shiller, the Yale economist, calculated that the S&P 500 index was up from a recreated 4.5 in 1871 to around 1400 today. But throw in dividends, and the index would jump to a calculated value today of around 742,000.

Curiously, no one overlooks interest income when calculating bond investments but stock investments are often weighed on price alone without dividends This may account for some illogical behavior of mutual fund investors who have been switching their investments from stock funds into bond funds. That might also be a fear-driven overreaction to current news as yields on such solid growth stocks as Apple and IBM easily outdo the yields on Treasury bonds and the funds that hold them.

Real news cannot be overlooked and the increasingly troubling drought in this country led me to sell our positions in Deere. Scarcity and rising crop prices may actually increase demand for agricultural equipment, however, I am concerned that there may be credit losses among Deere’s financing of equipment it has sold.

The firming tone of the stock market will probably encourage a greater use of stock options. I have found that their use often does not work out as planned. A surer house bet is with their creator, CBOE Holdings (CBOE-$28), operator of the Chicago Board of Options Exchange and other services. Its sales are now increasing steadily at 15% with earnings keeping pace. The company recently increased its dividend and now yields 2.1%.

Investor skepticism, aggravated by tension-inducing news, remains high. Uncertainty plagues the executive suites as corporations are sitting on almost $2 trillion in cash, up from $1 trillion a year ago. These anxieties are retarding economic recovery. In the meantime, they are restraining stock prices, a continuing opportunity for patient investors, especially those who remember that quality counts.

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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