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Taking Stock

Tony Crowell

Tony Crowell

Up, Up And Away

Stocks held their course through a choppy season of quarterly earnings reports. Many companies met or exceeded earnings estimates but often fell slightly short of forecasts for sales. Increased profits on decreased sales demonstrate improvements in productivity brought on by shaving costs after the financial crisis. Getting more from less has hurt employment but holds promise for higher earnings as the economic recovery continues.

The recovery is inching ahead, held back by politicized grasping at greater austerity and compounded by the artificial fiscal restraints of sequestration. The Federal Reserve, in concert with European and Asian central banks, continues its expansion policies. With interest rates low, these forces are combining to move stock markets higher.

The Dow Jones Industrial Average hovers near a new round number record of 15,000 while the broader S&P 500 flirts with 1,600. The over-the-counter NASDAQ is at a 13-year peak, although nowhere near its high of 5,048 set on March 10, 2000. That marked the end of the dot.com bubble when the prevailing euphoria sent many Internet stock prices to absurd multiples of their earnings, if there were any earnings. In contrast, the prevailing mood seems to be skeptical, with investor nerves still raw from the financial crisis and stock market collapse in 2008.

Like most market swings, that was an overreaction and stocks have since more than doubled. New highs on the Dow and the S&P appear imminent. With low interest rates, moderate stock valuations and restrained investor confidence, conditions are currently favorable for further gains.

There are still lots of reasons for anxieties, as there always are and will be. We are far from any boom but the U.S. economy is improving. Unemployment is declining and jobs are, at last, being created. Consumer spending, housing sales and prices, household net worth, consumer confidence and corporate profits together with corporate balance sheets are all strengthening. Fears that the stock market is heading for its fourth straight spring swoon seem overdone.  Shale energy extraction with its growing boost to U.S. energy reserves also brings a catalyst that could substantially spark the entire economy.

Individual stocks remain sensitive to news flurries. Allergan (AGN-$101) flinched on news that it would not advance development of two experimental drugs. Neither was part of the company’s profit forecasts and the brief sell-off was overdone. Apple (AAPL-$445) resumed an advance on news of a dividend increase and stock buyback. Its next price hurdle is $500. That will need some more exciting product news to pierce. Both stocks remain buys.

When the market seemed wobbly earlier this year, defensive stocks like utilities were in fashion. With confidence reappearing, cyclical stocks are taking their place. The Blackstone Group (BX-$20), a substantial manager of capital and other assets, has developing momentum. Earnings estimates for its June quarter look to $.54, up from $.19 and for the full year of $2.26, up from $1.77. These forecasts point to an undervalued stock, currently with a 4.5% yield.

Also in the financial sector, Partnerre Ltd. (PRE-$92) is a leading global reinsurance company. This is the quite profitable business of insuring part of the risks taken by conventional insurers, essentially being a high-class bookie. It does this very well and should earn about $7.00 this year. The current dividend provides a 2.7% yield and Partnerre has raised its dividend for 18 years.

Manufacturers will do quite well as the economy gathers energy. Possible buys include Cooper (COO-$109) (contact lenses and women’s health) and TransDigm (TDG-$149) (aircraft components). These stocks, like the overall market, are approaching new highs, usually a signal of further advances.

 

 

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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