Taking Stock

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By Tony Crowell
By Tony Crowell

Apple Days

 Peak earnings reports season is upon us. The Federal Reserve remained neutral and stocks are reacting to actual progress (or lack thereof) of individual companies. This week, the spotlight was on Apple (AAPL-$103) and the company came through.

Securities analysts spent much of the preceding quarters revising Apple earnings estimates downward. Actual results beat estimates modestly but collective sighs of relief immediately popped the stock over 6% higher. Although iPhone sales declined for a second straight quarter, they were over 40 million, bringing the total number of iPhones sold since inception to over a billion.

Apple has a market capitalization around $568 billion, first in that category, ahead of Exxon Mobil and Alphabet. Its prominence and the popularity of its products draw dozens of financial analysts, whose collective judgments missed. They must deal with complex factors that might impact Apple’s prospects, thus their reactions tend to be conservative, waiting for major events and changes in the consensus of other analysts. They are thus likely to scale estimates upward as Apple approaches its quarterly reports in October, typically when new products are announced.

Its stock is the largest position in my client portfolios and its stock profile is similar to others like General Electric (GE-$31) and Intel (INTC-$34). All three experienced setbacks in their business growth and then regrouped and advanced. They have the financial muscle to withstand these interruptions and their yields, currently between 2% and 3% on regularly increasing dividends, are most attractive in today’s low interest environment.

Mr. Buffett seems to agree. In May, his Berkshire Hathaway reported owning 9.8 million shares of Apple at the end of the March quarter. My airline pilot readers will be delighted to read that Carl Icahn, who bankrupted TWA, sold 45 million shares in the same quarter.

Earnings reports for many portfolio buy recommendations were a string of hits. Celgene (CELG-$110) led our biotechs, beating estimates on both sales and earnings while raising its outlook for the year. Amgen (AMGN-$171) also topped Wall Street expectations for sales and earnings and raised its outlook. Gilead (GILD-$81) reported weak earnings, slipping to a remarkably low valuation of seven times earnings in a sector where the average P/E is 40. It has substantial capital and needs either a merger or new drug approval to reignite its stock price. Both are quite possible.

Among larger companies, Simon Property Group (SPG-$224), the big mall operator, slightly exceeded estimates and raised its 2016 outlook. It also raised its dividend for the fifth straight year and now yields 2.9%. Visa (V-$79) and Verizon both beat estimates. Verizon bought Yahoo, the declining Internet star. This brought a mixed bag of assets, including a 15% state in Alibaba, the Chinese big player in e-commerce, which will take time to realize value.

Danaher (DHR-$81) beat earnings in the quarter during which it divested Fortive. Thermo Fisher (TMO-$158) also beat expectations and raised its outlook. It is acquiring microscope technology marker FEI for $4.2 billion. It just closed its buy of generics firm Affymetrix for $1.2 billion and plans to spend at least $8 billion on acquisitions through 2019.

Bristol-Myers (BMY-$74) beat estimates, as did Waste Management (WM-$66), Dr Pepper Snapple (DPS-$97) and Acuity Brands (AYI-$263). Recent recommendation Snap-On (SNA-$156) sustained its long-standing winning streak for the past several quarters as it beat estimated earnings. Sales missed by a slight margin and the stock price eased slightly in a demanding market.

So far, our stocks performed commendably. Reports are due in early August from Disney (DIS-$96), Huntington Ingalls (HII-$172) and NVIDIA (NVDA-$56). The latter two are looking solid with Disney somewhat wobbly. An accelerating housing recovery should boost reports from Lowe’s LOW-$82) and Martin Marietta Materials (MLM-$205). Earnings season will then slip away into the dog days of August, typically a dull month on Wall Street. Enjoy the summer!

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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