Stocks began the year as if shot from a cannon with their biggest rise in six months. This was partly a rally after of relief after Congress stumbled into a last minute tax compromise bill, even if its slipshod passage cured only the most immediate uncertainties. We still face more hurdles with raising the debt ceiling and squabbling over government spending.
The real relief comes from what Congress did not do. Although everyone agrees that the national debt must be contained, severe cuts in spending at this time would likely stifle the current economic recovery. There are some welcome signs of improvement in housing and manufacturing but the examples in Europe of the consequences of forced austerity should be instructive. To paraphrase St. Augustine, give me fiscal austerity but not yet.
The media can be relied upon to magnify any crisis and this one drove investor attention toward almost hourly news bulletins. Congressional irresponsibility creates damaging uncertainties, whose impact is aggravated as the media divert investors from the longer-range focus essential to investment success.
It is no secret that we will face further distractions as our elected representatives confront the debt ceiling (again) and the (briefly) postponed array of proposed spending cuts. These are complex issues that cannot be solved quickly. As long as our economic recovery continues, I believe that they will be resolved, given time. As Winston Churchill observed, “You can always count on Americans to do the right thing – after they’ve tried everything else.
Investor overreactions to all the fears that the media can provide a continuing menu of attractively priced stocks. Coupled with a record low interest rate environment, this remains a time to build portfolios, not to hide under the bed. After all, the stock market has returned gains for four straight years amid continuing skepticism.
The prime example is Apple (AAPL-$542). Its next quarterly earnings report will come around January 23 and the whimpering herds of Wall Street analysts have dropped their estimates to zero growth over the same quarter a year ago. This, for a company that has grown over 50% annually, makes no sense. Apple has never seen declining results in the Christmas quarter.
There are indications that its profit margins are tightening, however, much of this is due to an accelerating pace of new product introductions. The global economy is challenging but this was the case last summer when the company shocked analysts with its strong results. Now, the U.S. economy is stronger, the Euro is recovering, Apple’s sales in China are surging and new products like the iPad mini and the iPhone 5 will boost sales.
Its stock presently trades at only 12 times recent earnings, totally denying future growth. It yields 2% now with future dividend increases almost certain. Its finances are sound and its balance sheet gains over $10 billion every quarter. At some point, its size will inevitably slow its growth but remains a strong buy for almost any investor.
Tech stocks provide opportunities with companies who can establish superior growth, particularly in this sluggish economy. Akami Technologies (AKAM-$41) is a leader in systems and equipment that provide and accelerate cloud computing networks. Sales are $1.3 billion, up 13% over the last year. Earnings are growing at 17% and the forward P/E is 28, reasonable for a tech leader.
Disk drives are still a key component of information technology although competition has battered earnings in that sector. Seagate Technology (STX-$31) and Irvine-based Western Digital (WDC-$43) dominate the field and erratic results have driven their P/E ratios to around 6 times earnings. Seagate is slightly bigger and is a good bet.
Looking back at the recent “fiscal cliff,” it is only mild comfort to realize that it could have been worse. There are certainly continuing reasons for concern but one of the best indicators of stock market direction is the market, itself.
Provided the economic recovery does not reverse, another up year seems likely.
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. firstname.lastname@example.org 949.494.1376/