Treasury Bonds Or Tesla Stock?
Stocks sold off as the summer began, giving back the gains they achieved in May. Investors seemed unusually spooked by these fluctuations, possibly in reaction to all the publicity about new highs and the new level of Dow 15,000. As the market slid back before this magic level, new anxieties were hatched. Investors should recall that the overall market is still up 12% for the year. Even if the market remained flat for the rest of the year, that would still be a decent return.
It is unlikely to remain flat. The prospects of higher interest rates and the impact of increasing domestic energy production are already prompting ripples and eddies. Wall Street is enamored with Fed Chairman Bernanke’s program of extensive bond buying. Not only has this served to keep loan interest rates down in order to energize a sagging economy, but also the program has pushed bond interest rates down to remarkable lows.
These low rates make stocks more attractive. Taking the current 2% rate on the 10-year Treasury as an example, it is hardly difficult to find quality stocks paying dividends at higher rates. Apple (AAPL-$437), Bristol-Myers (BMY-$46), Chevron (CVX-$119), DuPont (DD-$54), General Electric (GE-$23), and Intel (INTC-$24) all offer yields of 3% or more. Each of these has increased its dividend in the last year, a feature never to be found in bond coupons.
On yield alone, stocks enjoy a marked advantage over bonds. In comparison to other markets, U.S. stocks also have an edge. The European economy is still regaining stability, Japan’s economy is reorganizing and China’s is uncertain, as is the integrity of its accounting. Gold continues its slump and rising mortgage rates may slow the real estate recovery.
Stocks will always be swayed sporadically by external events and continuously by swings in investor moods from fear to greed. Indicators that attempt to track investor psychology show it weighted to the fearful side, a generally good thing as market advances stem from periods of anxieties. Corporate profits are at record levels while prevailing skepticism continues to keep stock valuations moderate.
These factors will probably combine to keep the market flat for the summer. A strengthening economy should bring stocks to new highs by year-end. Investors should use this anticipated summer lull to tune portfolios, avoiding stocks that will be burdened by higher interest rates, while anticipating a continuing shift from “safe” utilities and well-known consumer brands to manufacturers and drug companies.
The fast growing natural gas vehicle sector will bring increased sales to Cummings (CMI-$117). This has not gone unnoticed with a $13 price bump during May and I hope to add more CMI closer to $110. General Electric is involved in many ways in natural gas, including a large separation plant in Saudi Arabia and a lab in Oklahoma to study improvements in fracking. Exxon, ConocoPhillips and Chevron are all large producers of natural gas.
I sold our positions in Home Depot, anticipating a possible slowdown in the housing sector. Aflac and Syngenta, longtime members of my portfolios, also were sells. These are strong companies but Aflac’s business in Japan may slow while Syngenta is encountering increasing concerns for its genetically modified seeds.
Franklin Limited Duration Income (FTF-$13) has again become a buy. This closed-end fund is down from $15 in a couple of months as it sold off with other bond funds. As its name states, its bond maturities are shorter than most bond funds. Portfolio duration is only 3 years and it yields over 6%,
As longtime readers know, I always emphasize high quality, dividend-paying stocks in larger, growing companies. That may not be exciting reading but it has resulted in good investment returns. As a rare speculative buy recommendation, I believe Tesla Motors (TSLA-$97) deserves a small position for suitable investors. Its stock is trading now on hopes for the future but unlike such predecessors as the Tucker, the DeLorean and the Fisker, Tesla now has financing. It raised a billion dollars without breaking a sweat, more than enough to build its proposed network of charging stations. It is in production and even reported a profit.
I suggest allocating no more than 1%-2% in most portfolios with everything else in solid stocks like those mentioned earlier.
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/