Taking Stock

Tony Crowell

Hiking On The Edge Of The Cliff

The headlines are alive with the sound of media flacks warning that the “fiscal cliff” will soon plunge us into chaos. Meanwhile, the stock market, like Old Man River, must know something as it keeps on rolling along. Stocks seem to have anticipated the probable outcome of current political discussions to be a partial success with some tax compromises accompanied by a few spending cuts with the remaining issues deferred until next year.

A complete breakdown of negotiations would be a major setback to the economic recovery. The severity of such an outcome makes it highly probable that the lawmakers will reach a workable compromise, although it may be at the last minute like the “Debt ceiling” last year. Despite all the much-publicized political clamoring, the stock market has recovered from its post-election slump and is now up 14% for the year with two weeks more to run.

Interest rates remain remarkably low, almost always a positive factor for stocks; the Federal Reserve announced that it intends to suppress rates so long as unemployment remains above 6.5%. With that rate now at 7.7%, it will probably take until 2015 to reach that mark.

The Fed expects the economy to expand slightly faster in 2013 at a 2.5% to 3% rate. That assumes that Congress and the White House can reach some sort of deal to avoid the Draconian impact of the scheduled tax increases and spending cuts. If they don’t, we’re headed back to recession, a severe but unlikely fate.

These are serious concerns but their impact seems discounted in stock market values. Unexpected events like the housing bubble are greater threats to the market and investors should resist the siren calls of surging overconfidence such as the house price euphoria that preceded that bubble. Anxieties provoked by overreactions to current news events stifle stock valuations; these are the times to buy.

With earnings reports for the current quarter likely to show improvement from the last one, attractive valuations are abundant for growing companies. Apple (AAPL-$530) is a poster child. The danger lies in its increasing size that could lead to stagnation. That happened to Microsoft about ten years ago as fresh competition eroded the benefits of its quasi-monopolies. These two currently trade at similar valuations but Apple is growing over twice as fast.

Unlike Microsoft in its glory days, Apple faces plenty of competition that keeps it on its toes. It is currently keeping alive the legacy of Steve Jobs with innovations that we previously didn’t know we wanted like the iPad and now the iPad mini. As a very newsworthy subject, it attracts much attention that, like the “fiscal cliff,” makes some investors overly anxious, thus discouraging the timid from buying and keeping its valuation quite modest. It even yields 2% with probable dividend increases ahead, a factor enhanced by the Fed’s reaffirmed policies.

Improving markets encourage spicier stock picks. 3D Systems (DDD-$45) is a leader in this rapidly developing new technology. As an example of its applications, it just announced new production of personalized hearing aid devices. I am adding the other major U.S, player Stratasys (SSYD-$69) as a new buy. Both have price: earnings ratios above 60 but match that with superb growth prospects. DDD is slightly larger and faster growing but more leveraged. I suggest pairing them in growth portfolios.

Tata Motors (TTM-$26) is quite different with a price: earnings ratio of only 7, reflecting the cautious valuations usually associated with automakers. A multinational company, its sales are approaching $40 billion with products ranging from the world’s least expensive car, the Tata Nano, to Jaguars and Land Rovers. Tata Daewoo, based in Korea, is a large truck manufacturer, and it has varied activities in Brazil, Russia and Africa. Its largest consumer base is in India but is growing in Italy, Spain and South Africa. Earnings growth should stabilize next year around 15%, making Tata an attractive value.

Attractive values appear among anxieties. This holiday shopping season looks good for stocks.

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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