renaissance

Taking Stock

Tony Crowell

Tony Crowell

Stocks Rehearse For A September Opening

There is an old theatre saying that a poor dress rehearsal means a successful opening once the regular run begins. This might be true although it’s probably a myth created to settle the nerves of the performers. If applied to the stock market, the anxious selling of the last few weeks would point to an improved performance by stocks as more normal trading resumes in the fall.

Stock players frequently search for some simple indicator that will point the way to future movements of stocks. There are none although thoughtful research, avoiding excessive leverage, patience, common sense and more patience go a long way.

Determining the market’s present trend is a starting point. The summer uptrend crested in early August with record highs on the Dow Jones Industrials and the S&P 500. The uptrend came under pressure and then reversed to a downtrend, eliminating July’s gains. Some disappointing earnings reports and the turmoil in Egypt contributed but the headline catalysts were growing fears that the Federal Reserve is ready to wind down or “taper” its bond buying and low interest rate policies.

Barring a reversal of the U.S. economic recovery, there is little question that the Fed is poised to shift gears. Despite all the media hyperventilation, it really doesn’t matter a great deal whether it “tapers” in September or December as much as what will be the effects.

Increasing interest rates may reduce corporate buybacks and are already ending the five-year bull market in bonds. (Bond prices move the opposite direction from interest rates.) As recently as May, the interest rate on benchmark 10-year Treasury notes was 1.6%, the lowest rate for decades. It’s now 2.8%.

New 30-year fixed-rate mortgages are now at 4.52%. That’s the highest in two years and over a full percentage point up from the 3.4% levels of late 2012. This has not slowed the housing recovery, in fact, sales are surging. This should provide a much-needed boost to employment as well as to retailers that outfit houses.

All this means that investors should tread carefully as the market adjusts to the reality of changing Fed policy. My recommendations include appliance maker Whirlpool (WHR-$136) and varied home product manufacturer Masco (MAS-$19). Generac (GNRC-$41) is smaller ($1.4 billion sales) but looks particularly well positioned.

The company makes a broad line of engine-powered generators and other products for residential, commercial and industrial markets. It posted impressive results for the second quarter with earnings per share at $.95, up 63% from the same quarter last year and well ahead of analyst estimates.

Some of this is attributable to the impact of Hurricane Sandy but the company reported continuing strong demand and raised its guidance for the rest of the year. Analysts look for around $3.75 for all of 2013, up from $3.19. Acquisitions are boosting its international sales and an increasing focus on natural gas products will expand its markets.

In the medical sector, Jazz Pharma (JAZZ-$83) also posted second quarter earnings that beat estimates and raised its guidance for 2013. The Irish-based company now expects earnings in a range of $6.20-$6.40, up sharply from $4.44. It raised revenue guidance to a range of $860-$880 million, up from $600 million. Jazz is a specialty drug company focusing on unmet needs in neurology and psychiatry.

Shareholders of Life Technology (LIFE-$74) approved its acquisition by Thermo Fisher for $76 cash with closing expected in January. This is a relatively low risk merger arbitrage with the “spread” offering now an annualized yield of 5.5%.

September may or may not bring a policy change by the Fed. It will certainly bring two new iPhones from Apple (APPL-$498) on September 10. Adding Mr. Icahn to its shareholders brought new interest to its stock. It is also quite possible that Apple may soon announce a deal with China Mobile, the world’s biggest wireless carrier. All this has made its stock even more attractive and almost certainly more profitable than a 2.8% 10-year Treasury. September looks interesting.

 

 

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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