renaissance

Taking Stock

Tony Crowell

Tony Crowell

Forevers Are Not Just For Valentines

Moving toward the midpoint of the first quarter, stocks continue to hold their course. With more days up than down and volume increasing on the up days, the market uptrend remains intact.  Most corporate earnings reports forecast continuing slow growth and the Federal Reserve has maintained its very supportive policy of keeping interest rates low.

This policy will not last forever, reminding me of the young man who said, “I told her I’d wait forever for her, but that was before I found somebody who’d give me a ride home” Bonds have had a good ride during this period of record low interest rates but the Fed has pledged to constrain rates only until inflation eases to 6.5% or inflation rises to 2.5%. Current economic growth indicates these targets will probably be reached next year, which will be very damaging to bond prices.

Stocks still have a tail wind and I wrote last week that overall reasonable valuations should encourage investors to shake a few reefs out of their sails. With spending increasing in the medical sector, advanced medical technology stocks should pull ahead. Although not bargain priced at 35 times earnings, Intuitive Surgical (ISRG-$570) has developed surgical robots that have increased its sales 24% in 2012  to $2.2 billion.

Surgeons have adopted ISRG’s main product, the Da Vinci, with enthusiasm despite its $2.3 million cost. (The Mayo Clinic has seven.) Patients actively seeking out robotic surgery also drive demand. In most cases, tissue damage is less severe, ameliorating the recovery from surgery. This recalls the period before anesthesia when the most sought after surgeons were those who successfully cut quickly.

Intuitive is the clear leader in a fast growing medical subsector. Earnings per share for 2012 were $15.94, up 29%. The company forecasts sales up in a 16-19% range for 2013. It is debt free, like Apple. Also like Apple, it has developed a closed model with proprietary software and hardware and controls all aspects of Da Vinci production.

Intuitive Surgical is a new buy and Apple a renewed recommendation, particularly at its current markdown price around $460. It is still the number one mobile phone maker in the U.S. with a 36% market share and the leading tablet maker with almost 50% of the market. As the media remind us almost hourly, it is a large, mature company whose growth cannot keep up the pace of its adolescence. Even so, its earnings are growing although its September fiscal year may show “only” single digit growth, still a P/E ratio of only 9. It offers a 2.3% yield on a newly initiated dividend that will almost certainly be increased this year.

Chicago Bridge & Iron (CBI-$53) is another new recommendation. Founded in Chicago in 1889, it soon turned from building bridges to liquid storage coinciding with the western expansion of railroads and then to supporting oil exploration in the U.S. and abroad. Today, it is one of the world’s largest engineering and construction companies with particular strengths in the energy and natural resource industries.

CBI sales in 2012 were $5.2 billion, up 24%. It will soon close its pending acquisition of Shaw Group (SHAW), another global engineering and construction company; that will bring combined sales to well over $10 billion. There will be inevitable settling down issues but the combined companies should be good for around $4.60 in earnings, which a P/E of 13 would equate to a $60 price.

CB&I is taking advantage of the development of the massive oil and gas shale deposits in the U.S. It is one of the few firms able to handle large LNG terminals and processing plants. The Shaw acquisition expands its nuclear and environmental capacities. Stock proxies for the merger show combined forecast earnings in three years of $8. If achieved, as seems quite likely, that could equate to a $100 stock price.

Warren Buffett, Prince of Stocks, says his favorite holding period is “forever.” These stocks could all qualify for such holding periods. Their quality makes them unlikely to be dumped for a better ride.

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. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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