Quarter Ends with a Rumble
As the second quarter ends, the stock market continues to rumble. Recently leading technology stocks are encountering selling even as bank stocks are moving up. Such rotational strengths are common and selling among the more glamorous leaders seems to have been encouraged by the whopping $2.7 billion fine assessed by European antitrust regulators against Google’s parent, Alphabet.
The rumble is easing into a selling stumble as we near the end of the month but the Dow Jones Industrial Average is still around 21,350, up 3% for the quarter and almost 8% for the first six months. The broader S&P 600 index is similar while the tech-heavy NASDAQ is up 9% for the quarter and 14% for the year-to-date.
The surge is not confined to the big tech companies labeled as “FANG” (Facebook, Amazon, Netflix and Google) but includes many of our favorites like Broadcom (AVGO-$231) and Microchip (MCHP-$76). Unlike the arithmetic Dow Jones Averages, based on stock prices alone, the NASDAQ as well as the S&P are weighted with the market capitalizations of their stocks, thus price surges in the bigger cap stocks tend to exaggerate movements in the averages.
Investors have been nervous about earnings overvaluations ever since stocks began their bull run from the deeply oversold bottoms after the Financial Crisis. Bull markets climb these walls of worries and the abilities of the large cap tech stocks like Apple (AAPL-$142) have proven their value as the new core members for stock portfolios.
Looking at the “model portfolios” pimped by brokers last century, they emphasize tired names like GM, Exxon, Kodak, J.C. Penney and “growth” companies like Polaroid and Dell Computer. Today’s technologically driven economies demand emphasizing larger tech and biotech companies with proven abilities to succeed under rapidly changing forces.
Our ten largest portfolio positions are Apple, Amgen (AMGN-$172), Nvidia (NVDA-$148), Amazon (AMZN-$980), Visa (V-$95), Celgene (CELG-$134), Novo-Nordisk (NVO-$42), Broadcom, Morgan Stanley (MS-$45) and Applied Materials (AMAT-$41). All are buys, preferably as softer overall markets may take them down 5%-10% before their quarterly closes.
With the prospects of the Federal Reserve continuing its program of raising interest rates now firmly underway, I continue to recommend accumulation of short-term bond funds. Investors must avoid the trap of reaching for the higher yields from long-term bonds. Their turn will come but not for years until the Fed begins to ease rates. I suggest increasing the weighting among portfolios from 15% to 20%.
Diversification is useful but should not be overdone lest it induce complacency. With the success of larger growth stocks within our portfolios, I suggest a new 5% weighting to smaller “value” stocks such as those that make up the Royce Value Trust (RVT-$14.45). Royce is an old line firm that began its focus on small-cap stocks in 1972, the era of the “nifty fifty,” a group of highly publicized large growth stocks that became overbought and dipped sharply before a period of recession and inflation.
Its Royce Value Trust is a closed-end fund holding over 300 companies with market caps less than $300 million. It currently trades at an 11% discount from net asset value and pays 7.4% quarterly. Management fees are low and its annualized return since inception in 1993 is around 10%.
Cyclical stocks provide other opportunities. MDC Holdings (MDC-$35), a Denver-based homebuilder, stands out with relatively stable earnings growth. Its next earnings report is due in a month and should show $.60, up from $.52, pointing toward $2.51 for the year, up from $2.00. There is even a 2.8% dividend yield, unusual for this sector.
The first two quarters get good grades. The next? No one knows and inevitably, the economy will slip and stocks fall back, as Mr. Buffett repeatedly emphasizes, bull markets last longer than bear markets. Stocks tend to outpace inflation. Prudently invested money compounds.
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
