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Taking Stock

Tony Crowell

Election Jitters

The market stumbled recently amid uncertainties about third quarter earnings and the imminent election. Down 2% in October, it’s still up over 12% for the year. Momentum should carry to higher returns once the election is past us and we approach yearend. In most election years, by this time the probable winner has emerged and the market has adjusted its expectations accordingly. This year, the race remains close and the stock market awaits a decision.

Barring a disputed outcome as in 2000, resolution of this major uncertainty will ease investor anxieties. Meanwhile, the prevailing uncertainties are exaggerating reactions to third quarter earnings. Minor misses of analyst estimates knocked down the prices of 3M, IBM, Intel, United Technologies, DuPont, General Electric and other blue chip companies.

In the tech/consumer sector, both Google and Amazon missed badly and were knocked down accordingly. Apple beat its own conservative guidance for both sales and earnings but missed Wall Street estimates slightly, adding to recent price weakness. Apple remains a buy, particularly near $600. Its recent quarter was remarkable for such a large company. Earnings were up 23% and sales 27% to $36 billion yet its stock is still trading at 14 times forecast earnings with a 1.7% dividend yield.

As usual, the media are exaggerating shortcomings. With results in for about a third of the companies in the S&P500, over half have actually exceeded earnings forecasts with only 27% missing. Among my continuing buy recommendations, those beating estimates include Amgen (AMGN-$88), Aflac (AFL-$50), Syngenta  (SYT-$75) and U.S. Bancorp (USB-$33). These are all trading near their 52-week highs but are still reasonably valued on their earnings.

3D Systems (DDD-$43), a recent more speculative buy, bounced up 5 points on a nickel beat of estimates. SolarWinds (SWI-$49), a former recommendation, beat estimates, bounced up five points and then dropped five points for no obvious reason. With these varying investor reactions, it seems best to stick to larger and hopefully more stable companies.

Costco (COST-$96) qualifies with almost $100 billion in sales and a steady growth record under its respected management. Its operating margins are less than competitors Wal-Mart and Target but its sales are growing substantially higher than either. Unsurprisingly, its record means a higher price to earnings ratio of 21.

The company is famous for its customer service. It has not forgotten its shareholders, having raised its dividend for seven straight years. The current yield is 1.1% and its record and projected growth makes it a solid buy.

Costco’s short-term stock price movement will be affected by consumer actions during the coming holiday season. Those add another uncertainty, of course, and Thanksgiving with its famous “Black Friday” will provide fresh guidance. The lower price end of retail seems less fragile and Costco is complements our existing positions in TJX (TJX-$41) the well run off-price operator of T.J. Maxx, Marshalls and HomeGoods and other stores.

Simon Property Group (SPG-$151), the largest owner of shopping malls, exceeded Wall Street estimates for the third quarter. It increased its own earnings guidance to a range of $7.80 to $7.85, well above its initial guidance for 2012 of $7.20 to $7.30. It increased its dividend for the fifth consecutive quarter to $1.10, a total increase of 17% from what it paid in 2011. This is also 22% higher than its level before the great recession. Many other REIT’s have dividends less than their 2008 levels and Simon has the highest increase in its sector.

Political quarreling is reported to have reached levels of anger and dispute not seen since the Civil War. The nation has survived worse crises than the 2012 General Election and I am confident that its outcome will not precipitate the end of the world. It might even ease the anxieties that are aggravating stock prices. Careful selection of growing blue chip stocks should harvest another reason for Thanksgiving.

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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