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Taking Stock

Tony Crowell

Tony Crowell

Crack On More Sail

Like a sound ship in moderate seas, the stock market is maintaining a steady course and speed. Sailors know that even calm waters demand vigilance even while permitting cracking on more sail. This year, the market is up more than 5%, a better performance than all of 2011. Since the beginning of 2012, the overall stock market has gained around 20% and remains in an uptrend.

This progress seems to have left two investor moods. One group regrets having missed much of this rally by clinging to low yielding money market, CD’s or other cash equivalents. Readers of this column should not be among that group. Others distrust market gains, having seen the market rise to current levels twice since 2000 and then fall back in bear markets.

The saving grace today is a considerably higher level of actual corporate earnings combined with a lower valuation of these earnings, giving stocks room on the upside. Some factors that scared investors away have eased. The danger of a financial collapse in Europe has lessened, China rode through a down cycle without an abrupt halt and U.S. energy production has surged, reducing dependence on Middle East oil supplies.

Our fiscal deficit, which became the subject of shrill nonsense during recent elections, is improving with our economic recovery. It still needs attention but is declining as a percentage of the overall U.S. economy. Fiscal austerity doesn’t work. Ireland, Greece and Britain are current examples. Fortunately, the U.S. initiated some stimulus spending and avoided, or at least, postponed, Draconian spending cuts. Revenues from an improving economy are the best way to cut deficits.

With fears subsiding and valuations encouraging, investors can anticipate a continuing favorable stock market. Returning confidence favors stock prices of medium sized companies. Continuing buys include: American Vanguard (AVD-$32), Co. Richemont (CFRUY-$8), Calumet (CLMT-$36), Danaher (DHR-$61), Eastman Chemical (EMN-$74), RPM (RPM-$32), and Titan (TWI-$26).

My newest recommendation is Packaging Co. of America (PKG-$40). This maker of containerboard and corrugated paper products is approaching $3 billion sales. Earnings are forecast to accelerate during 2013 to around $2.75 a share, up nicely. It recently increased its quarterly dividend by 25% to 31.25 cents, a resulting 3% yield.

It cut its dividend in half when the economy sagged 2009 but has now more than doubled it. This dividend pattern is an excellent signal for a cyclical company like PKG of its management’s views for its prospects. PKG forecasts earnings for this March quarter of $.56, 32% ahead of last year. The company is clearly in recovery mode and current overall economic conditions should add buoyancy to its stock price.

This is not the time to speculate with stocks in unproven companies, in fact, it is never the time to try that. With interest rates low, it is also not the time to experiment with tempting investments offering yields that are, quite literally, unbelievable. Local readers will doubtlessly remember Charles Keating and the above average returns promised on his bank’s deposits. Financial regulators are reported to be dealing with increasing complaints about new schemes such as private REIT’s that promise above market yields. Sticking with quality publicly traded securities works quite well for thoughtful investors.

Good returns on stocks in good companies are realistic; the record proves that. With confidence returning, investors can consider shifting funds from overly familiar household names in possibly overpriced stocks like Coca-Cola or Wal-Mart. Steadily growing smaller companies now offer an increasingly attractive risk: reward ratio,

The apparent safety of bonds will also prove to be questionable once interest rates climb. They are already inching up and values of even the highest quality long-term bonds will dive for the deck when an improving economy leads the Fed to allow rates to move upwards. Federal Reserve policies have been effective despite nonsensical behavior by the Congress and investors should consider carefully adjusting their sails for a little more speed.

 

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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