Taking Stock

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Tony Crowell
Tony Crowell

It is a Happy Halloween!

Stocks are greeting Halloween with a strong October, up around 5% since the end of August. Other than companies dependent on oil and gas prices and some exporters whose sales are pressured by the strong dollar, most stocks are showing increasing strength. The stock market remains sensitive, with individual stock prices reacting to new earnings reports.

On balance, reported earnings are running slightly ahead of analyst estimates with forecasts for the fourth quarter reflecting measured optimism. Federal Reserve officials kept interest rates steady after their two-day meeting this week but said explicitly that they may raise rates in December if the economy continues its current recovery.

Although not mentioned in its statement, the Fed may be influenced in its December decision by progress in negotiations toward raising the government’s borrowing limit. Financial commentators will doubtlessly revisit us with their familiar fretting about Fed action but rates are at such low levels now that any increase is unlikely to damage the current rally. By removing a long-discussed uncertainty, a rate increase might even bounce stocks up.

More immediately, many of our positions are coming through nicely. Apple (AAPL-$119), which had slipped to $110 in early October, reported sales for the quarter of $51.5 billion, up 22% from 2014. Its iPhone sales were also up 22% to a remarkable 48 billion [!]. Despite analyst fretting about its business in China, its sales to the region doubled to $12.5 billion.

The quarter ended its fiscal year with sales up 28% to $234 billion. It forecasts $75.5 billion to $77.5 billion for the December quarter. That would be only a modest increase from last year but Apple is known for conservative guidance. With reported earnings of $9.22 a share and $9.80 forecast for next year, its stock is undervalued at only 13 times earnings.

FedEx (FDX-$155) reported a slight decrease in forecast earnings to $10.40-$10.90 a share. That disappointed some analysts, even though it would be a 20% increase. More immediately, FedEx forecasts 317 million shipments this holiday season, a 12.4% increase. It usually exceeds expectations and its stock is also a buy.

Those projected shipments are good news for retailers. Simon Property Group (SPG-$205) moved to a new high as its results beat expectations and it raised its dividend. I expect similar results from TJX (TJX-$73) and Costco (COST-$157), who will report their earnings in late November. Nike (NKE-$130) will also benefit.

Medical and biomedical stocks are having a good year. Some investors are nervously selling on exaggerated fears of possible price regulations. The leading companies practice enlightened self-regulation and their research into new solutions will continue to favor their stocks.

Amgen (AMGN-$161) reaffirmed its merits as a continuing buy, It reported 3Q 2015 earnings of $2.72, well above both analyst estimates of $2.38 and last year’s earnings of $2.30. Sales were up 14% to $5,723 million. It also upped its previous guidance to a new range for 2015 of $9.95 to $10.10. It will increase its dividend 27% early next year to $1.00. Amgen is thus trading at a P/E of 16 while yielding 2.5% with a pipeline of promising new drugs.

Also in this sector, Bristol-Myers (BMY-$67) and Shire plc (SHPG-$226) beat analyst estimates. Jazz Pharmaceuticals (JAZZ-$137) will November 9. Its shares have fallen from $195 on worries affecting the wider health-care sector plus public furor over less responsible companies hiking their drug prices. It now trades at 11 times estimates of $11.72 per share, up 20% from an estimated $9.66 for 2014. I recommend increasing positions prior to its earnings release.

In other sectors, Visa (V-$78) reports on Nov 2 and Disney (DIS-$114) on Nov 5. Both have positive momentum and buys before earnings releases look timely. After all, the usually reliable “Halloween Indicator” looks particularly favorable as the market is riding a momentum wave. The Halloween indicator refers to the stock market’s seasonal tendency to produce its best returns between Halloween and May Day. Its corollary is the “Sell in May and Go Away” seasonal slogan. When the two months prior to Halloween produce a positive return, as they just did, since the late 1800’s, the Dow has produced an average Halloween-to-May-Day gain of 6.8%. Happy Halloween!

 

 

 

 

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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