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Taking Stock

Tony Crowell

Tony Crowell

Back To Basics

With no new announcements from the Federal Reserve, the stock market calmed down. In May, Chairman Bernanke’s comment about prospective tapering of its supportive policies spooked Wall Street and set off a 6.4% pullback. Since then, the markets seem to have accepted a prospective tapering of the Fed’s programs by year-end.

Lacking a convenient barometer to signal day-to-day trading, the market has gotten back to basics, namely corporate earnings. On balance, these are favorable. With 130 companies of the 500 in the S&P having reported, 71% have beaten analysts’ estimates for the quarter. Company forecasts for the rest of the year are guarded, as usual, but still provide a basis to expect a pickup in U.S. business activity this fall.

There were some misses, notably Google (GOOG-$892), which lost over five percent as earnings fell short due to price pressures in an increasingly crowded mobile advertising sector. Sales disappointed even though they were up 19% to $14 billion from last year. Analysts dropped estimates for all of 2013 to around $43.50. That would still be a 10% increase and a price: earnings ratio of 20, quite reasonable for a growing company with a dominant position in several markets.

Investors in Apple (AAPL-$440) were eager for any good news and a somewhat modest “beat” of analyst estimates sent it up 20 points. Analysts predicted quarterly sales of 31 million iPhones, a bar that Apple beat by 5 million. Its growth has slowed in some sectors like tablets but its 2013 earnings look to be in a range of $38-$40 per share. That’s a ridiculously low P/E ratio, particularly for a company with $140 billion in cash reserves. It yields almost 3% with a nearly certain probability of further dividend increases.

Earnings forecasts indicate increasing strength in manufacturing and financial stocks. Crane Co. (CR-$62), a Connecticut company founded in 1855, makes and markets worldwide a diversified variety of engineered industrial products. It reported strong quarterly results, increased its dividend for the twelfth consecutive year and raised its forecast for 2013 earnings to a range of $4.10 to $4.25, up from last year’s $3.70.

Prudential Financial (PRU-$78), the well-known insurance company, is accelerating growth after recovering from complications of the financial crisis. It reports earnings on August 6 that should be close to $2.00 a share, up from $1.32. Current estimates look to a range for the full year of $8.25 to $8.50, up from $6.27. Its earnings announcement will give a better look at expectations for the full year. Taking half positions now looks attractive. Yield is 3.1% with four years of increases.

After six years of one crisis after another and a near collapse of the Euro, the European economy has bottomed out and the first steps of recovery are visible. Scaling back of fiscal austerity measures and belated easier monetary policies have taken root. The recovery remains fragile but even the more vulnerable economies of its southern tier seem headed for positive growth in 2014.

European stocks have lagged our markets this year, creating some good values. Zurich-based ABB Ltd. (ABB-$22) provides power and automation technologies. Sales in over 100 countries exceed $40 billion, up 6% in its second quarter. Earnings were up 18% but fell short of analyst estimates, taking a point off its stock price. ABB’s valuation is reasonable and its 3.2% yield attractive.

Although trends are favorable, there are still many issues with our own economy. The jobless rate is still too high and growth too slow, hampered by politically motivated austerity measures like the foolish lock step “sequester.” The middle class is squeezed while corporate profits are at record levels. Taking its cues from these corporate earnings, the stock market is setting records.

After early May’s overenthusiasm, the drop to the lows of June cleared out excessive exuberance, making way for a run to new all-time highs. Along the way, the S&P 500 moved up 16 out of 19 trading days. Pauses were minor and volume picked up with broadening participation.

The last such string of gains was in 1995. Six months later the market was up another 13% and 22% a year later. I feel the basics today support further advances to 16,000 on the Dow and 1,700 on the S&P 500.

 

 

 

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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