Taking Stock

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Tony Crowell
Tony Crowell
Seventh-Inning Stretch

Stocks continue their upward trend with the S&P 500 Index ahead seven percent so far in 2017. As good bull markets should, the market has climbed a skeptical “wall of worry.” That’s encouraging, as history has repeatedly shown that markets usually succumb in euphoric times when worries are not obvious. Momentum alone is likely to pull stocks further ahead as we move into the summer but there some cracks developing in the facade.

A pause after a run of several months is normal, particularly with summer slowdowns lying ahead. The tempo is slowing, much like an Adagio following a spirited Allegro symphony movement. Investors should use this interval to tune their positions.

Manufacturing and energy have gotten much media attention recently, cloaking possible weakness in the consumer sectors. Retail trade provides jobs for almost 16 million Americans, 11% of the total workforce. Hospitality jobs at restaurants and hotels are similar. These two groups thus comprise 22% of the total workforce while the entire manufacturing sector employs around 12 million, only 9% of the workforce.

Consumer confidence levels hit high levels after the elections but a lack of progress in Washington on economic issues is adding risk. Retail and food service sales levels were down in February and March. U.S. GDP growth in the March quarter was an anemic 0.7%, the lowest in three years.

The Federal Reserve expressed concerns with this pace and voted this week to leave interest rates unchanged. It commented that it views the slowdown as “transitory” and its next meeting in June will bring sharply focused investor attention.

Earnings reports are generally better than expected although market reactions have been inconsistent. Pepsi, Boeing, Proctor & Gamble and Texas Instruments all beat earnings estimates but their stock prices then slipped. Apple (AAPL-$146) briefly set a world record market capitalization of more than $776 billion, beat earning estimates and then disappointed Wall Street with iPhone sales of “only” 50.76 million against estimates of 52 million. Meanwhile, it boosted its dividend 10%, becoming the world’s largest dividend payer. It remains a buy and the largest position in my client portfolios.

Auto sales slumped in April, the fourth straight month of sales not reaching expectations, signaling the auto market peaking after seven fat years. Although valuations are quite reasonable, negative trends have a way of getting worse and I sold our positions in General Motors and Magna.

Ever developing geopolitical crises, will spur additional defense spending, an announced goal of the Administration. My new buys in the defense sector are General Dynamics (GD-$193) and Northrop Grumman (NOC-$244). GD joins previous buy Huntington Ingalls (HII-$185) with substantial shipbuilding and marine systems for the U.S. Navy. Its Gulfstream division is a leader in business jets and its aerospace sales are soaring.

Northrop is also strong in Aerospace and is expanding its cyber security businesses into both government and commercial systems. It is a leading provider of unmanned aircraft, satellites and space systems.

Both companies are trading at 19-20 times earnings with expected earnings growth in a 10%-14% range. Each yields around 1.5% with excellent records of consecutive dividend increases. Both companies beat estimates for first-quarter earnings and raised forecasts for full-year earnings.

After stumbling through various uncertainties, the economies of Europe are stabilizing and a stable outcome to the French elections would help. Two pharmaceutical companies, Shire (SHPG-$180) and Novo-Nordisk (NVO-$41), beat earnings estimates and raised future guidance. Both previously suffered stock price setbacks, Shire from regulatory approval issues that blocked a merger and Novo from pressures on drug prices. Irish-based Shire (SHPG-$180) will earn around $15 this year, good growth at a very reasonable valuation. Novo’s earnings look flat this year in a $2.15-$2.25 range, heading to $2,40 next year.

Stocks bottomed out after the Great Recession ended, a little more than          seven full years ago. That’s a timely signal for a “seventh-inning stretch” to tune stock portfolios, possibly to make some lineup changes. It is not a time for rookies.

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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