Patience Pays Dividends
The new Administration is finishing its third week of its “shakedown cruise,” a nautical term for the “sea trials” of a new ship. These serve to familiarize her crew and to ensure that all of the ship’s systems are functional. Usually, Naval customs provide that the ship is not committed to operational tasks until problems detected during the shakedown cruise can be corrected.
Political changeovers begin immediately and the new Administration jumped into several areas before even getting the full crew on board. The results have been three weeks of developing uncertainties. Usually, uncertainties spook stock investors but the market has held up rather well.
The immigration controversy rattled investor nerves enough to send the Dow Jones Industrials below the much-publicized 20,000. Aided by somewhat less turmoil and a round of favorable corporate earnings reports, stocks got their wind back and sent the market to new record highs well above 20,000.
Investor psychological indicators are mixed. Technical ratios based on option activity and newsletter writers reflect sentiment favoring the bulls. Sentiment is a contrary signal, thus such bullishness shows possible complacency, never a good sign for stocks. On the other hand, the market’s ability to resume its recent good performance despite a plethora of uncertainties shows encouraging resilience and persisting strength.
Pessimistic uncertainties seem to be holding investors well short of dangerous euphoria while hopes of implementation of pro-business policies provide a rough balance for stocks. That keeps the focus on business developments, particularly fresh earnings reports.
General Motors (GM-$35) reported stronger-than-expected 2016 earnings and raised its global car sales for the next four years. The stock was flat as investors obsessed over potential overseas problems. It’s an excellent buy at only six times earnings with rising sales and a 4.3% dividend yield.
With strong car sales. Magna (MGA-$43), the world’s most diversified auto supplier with $37 billon sales, shows accelerating market share with earnings growing at 10-12%, a valuation like GM of only six times earnings and a 2.3% yield with dividends increased for the past seven years.
Fiat Chrysler Automotive (FCAU-$10) is a new buy for more aggressive investors. Its nameplates include Jeep, Dodge, Ram, Alfa Romeo, Fiat, and Maserati. The company forecast earnings of around $4.50 for 2018, a remarkably modest forward ratio of two times earnings. Alfa has been trying to get back into the US market for a decade and is finally back with the midsize Giulia and a 505 horsepower Quadrifoglio, with a SUV following next year. No dividend prospects but its CEO is trying to find a merger partner, probably Volkswagen or even GM.
Disney (DIS-$109) beat analyst earnings estimates but still sold off slightly as its ESPN network lagged. Theme parks were strong despite a $70 million hit from Hurricane Matthew with increasing attendance at its overseas parks, including the new Shanghai park that is approaching breakeven on ten million investors expected this fiscal year. Several new films are expected to open near the end of 2017 in Disney’s fiscal 2018.
Visa’s (V-$85) quarterly earnings blew through analyst estimates, and it raised its outlook for 2017. Like Apple, Visa combines technological strengths with a leading position among consumers. Earnings for the coming year are forecast at $3.35, up from $2.84, consistent with its 5-year annual growth rate of 16%.
Amazon (AMZN-$823) continues to innovate. Its latest idea involves those Amazon boxes that clutter our garages. The company is providing a free shipping service for donations to Goodwill that can be made by using the boxes for clothing and household goods. Amazon’s web site provides free shipping labels and tax receipts.
Amazon is in informal competition with Alphabet (GOOG-$810) to see which can boast a stock price over $1,000. I’ll take Apple (AAPL-$132), adjusted for its 7 to 1 three stock split years ago. Its stock split history is a good reminder of the virtues of patience and perspective in stock investing. Apple’s first of three 2 for 1 splits took place ten years ago. These three splits plus the 7 to 1 split mean that a single share of Apple in 1987 would have become 56 shares today.
Tesla innovator Elton Musk said, “Patience is a virtue, and I’m learning patience. It’s a tough lesson.”
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
