Taking Stock

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Tony Crowell
Tony Crowell

Feeling For The Bottom

Stocks finally struck some sparks of light after a wretched quarter. Whether these can relight a fire under the market remains to be seen but initial results are encouraging. A disappointing employment report actually lifted stocks as hopes revived that the Federal Reserve would continue to mark time before bumping up interest rates.

The Fed’s release today of the minutes of its September meeting revealed concerns that may delay the next increase until 2016. Although various polls of economists and analysts still predict an increase this year, persisting worries by the Fed about the stubborn refusal of inflation to return to its targeted 2% rate suggest otherwise.

While it might seem illogical that the Fed needs to increase the rate of inflation, a mild but stable rate is one of the underpinnings of its statutory mandate of protecting the U.S. currency and inducing full employment. Japan’s almost stagnant economy is an example of the consequences of flat inflation and underused monetary stimuli. Our inflation rate has lagged the Fed’s target for over three years and depressed energy prices continue to cool overall price increases.

Even with rates near zero, the U.S. dollar continues its relative strength amid uncertainties about China’s economy and other emerging markets. The impact of the stronger dollar is already showing up in reduced earnings of U.S. exporters. With depressed earnings among the energy sector, the stock market will be very sensitive to forthcoming comparisons of quarterly earnings reports with their “expectations.”

Acuity Brands (AYI-$197) jumped over a dozen points on news that its annual earnings were up 36%. Even though this beat published views only slightly, disappointing results by rival Eaton (ETN), had dimmed “expectations” for the LED-lighting fixture company. Acuity is looking toward increasing future sales from smart streetlights and interconnected systems.

Seven years ago, Acuity sold almost no LED-based fixtures. It invested significantly to become the digital-lighting market leader. Its surge is somewhat similar to that of technology giant Intel (INTC-$32), whose stock price finally pushed through $30 as buyers realized that the company is no longer primarily a supplier to PC’s after strong sales reports for its data centers, Internet of Things and flash memory businesses.

Altera (ALTR-$51) stockholders approved its acquisition by Intel for $54 cash. Most regulatory approvals are in hand and the transaction is scheduled to close by year-end. An $.18 quarterly dividend eases the waiting and the spread is attractive.

Retail sales are showed modest gains in September. Costco (COST-$151) popped up after a 2% increase in same-store September sales and is nearing a new high. TJX (TJX-$72), another off-price retailer, announced a new CEO and is also heading toward its high water mark.

The housing market continues moderate but promising gains. In 2005, before the financial crisis, the

American homeownership rate was 69%. It’s 63% now with demand increasing and supplies still lagging, particularly in the price range for first-time buyers.

Trex (TREX-$40), the largest maker of non-wood products for decking and railings, is a timely buy. Its products are unique, made from recycled wood-dust and recycled polyethylene. Its price dropped from $57 in August when it lowered projections for the third-quarter earnings. I believe this drop was an overreaction in price for a company with a significant market position and recommend buys before its earnings announcement on Oct. 27.

The overall economy continues to advance despite lagging energy and export sectors. Interpublic (IPG-$20), the diversified advertising group with over $7 billion of sales has been ringing up annual sales and earnings increases at around 15%. It reports Oct. 21. The dividend yield is 2.4% with increases for the past two years.

There is little question that the tenor of the market has changed with good news no longer being ignored. There are certainly soft spots but stronger stocks will receive increasing acclaim as the overall market regains its footings.

 

 

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 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

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