After The Fed Meeting
The Federal Reserve gave Wall Street an early Christmas present with its decision to leave interest rates alone for now. It marked this present as not to be opened until Christmas, when the Street expects it to boost rates, which would be the first increase since December of 2015. That was the first bump in seven years and touched off a selling spree, leaving the Dow Jones Industrial Average and the S&P 500 down slightly for 2015. They’re up 6% this year with a second rate increase probably returning this December.
Bond prices already anticipate a modest raise with the 10-year Treasury up to a 1.6% yield. Rates are still near record low levels and pose no immediate threat to borrowing costs. Companies with solid balance sheets need not fear rate increases; Apple (AAPL-$114) ranks high among the prepared. With $230 billion cash, rising earnings and a 2% yield, its shareholders need not worry.
Intel (INTC-$37) and General Electric (GE-$29) are also anchors to windward. Both have successfully managed complete makeovers of their fundamental businesses and are now back to rising earnings. Analysts have increased earnings estimates for the full year to $2.57 for Intel, up from $2.33, and for GE to $1.51, up from $1.31. Intel currently yields 2.8%, GE 3.1% both from dividends that will, in all probability, be boosted annually.
These three stocks are core positions for almost any portfolio, particularly with their dividends reinvested. Adding a medical stock like Amgen (AMGN-$175, 2.3% yield) produces an excellent portfolio from only four positions.
Bristol-Myers (BMY-$56. 2.6% yield) would complement these despite its stock price dip after disappointing trials of proposed expanding efficacy of a key immuno-oncology drug. Hopes of approval of first-line treatment for lung cancer pushed its stock to $75 in August. In retrospect, expectations were too elevated and the price reaction is overdone. Analysts now estimate 2016 earnings around $2.62, up from $2.01 in 2015. That is still strong growth from a company of its size (/$18 billion sales). Like Intel and GE, its earnings are rebounding. It remains the leader in lung cancer therapies. BMY goes ex-dividend the first week in October and reports earnings toward the end of that month, making this an opportune time for buying.
Amazon (AMZN-$802) continues to conquer new markets, including apparel. Unsurprisingly, it is the biggest clothing seller online. After an 87% increase last year in the number of apparel and accessory products on its website, its apparel sales hit $16 billion, all online. That was more than the combined online sales of its five biggest online rivals-Macy’s, Nordstrom, Gap, Kohl’s and L Brands.
Amazon is also rapidly closing in on its brick-and-mortar competitors, among whom it is already fourth in all apparel and accessory sales. Wal-Mart leads with $24 billion, Macy’s has $21 billion and TJX at $17 billion is only slightly ahead of Amazon. Much as I admire the managers of TJX, which operates TJ Maxx, I have sold our positions in TJX. Amazon is a buy below $800 for aggressive investors.
Wells Fargo (WFC-$45) continues its public foundering. Warren Buffett has said, “It takes 20 years to build a reputation and five minutes to ruin it.” His Berkshire Hathaway is by far the largest shareholder with 10% of its shares and it will be interesting to see what happens. Mr. Buffett plans to make no comments on this situation until November, at the earliest.
I sold our Wells Fargo stock a few months ago. We own Wells Fargo Advantage Multi-Sector Income Fund (ERC-$12), a closed-end bond fund that has provided attractive returns. This is connected with the bank in name only, the bank’s industrious employees being unable to create unauthorized positions in a bond fund without paying for them.
Recent studies have confirmed my intuitive guess that women as CEO’s outperform. They are still relatively rare with only 5% of the S&P 500 having a female CEO. Of the 16 in this group with at least three years on the job, 75% outperformed the index. Studies over longer period confirm this outperformance with particular strength among troubled companies that needed turnaround performance. Charlotte Whitton, Canada’s first major city mayor, said
“Whatever women do they must do twice as well as men to be thought half as good. Luckily, this is not difficult.” It may well be that stock analysts have overlooked this criterion.
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
