renaissance

Taking Stock

Happy Thanksgiving From Wall Street

By Tony Crowell

By Tony Crowell

Stocks entered Thanksgiving Week at record levels with the Dow Average through 16,000 and the S&P past 1800. The NASDAQ over-the-counter stock index is also having a good year although it is the ghost at the banquet, still over 20% below its exuberant levels during the Internet bubble of 2000. Excessive exuberance is always a threat to stock prices but today’s market is managing to inch ahead in a cautious climate of controlled skepticism.

A common error as stocks make new highs is that such action necessarily means that the market is sailing on froth with stocks are overvalued and ripe for a correction. It’s market valuations-not arithmetic levels that matter. The market averages may be trading at record levels but the S&P 500 is trading at a moderate 19 times earnings. That’s slightly above its historic average but far from its all-time highs.

Rising earnings moderate price: earnings ratios and Wall Street analysts will soon be broadcasting their takes on initial holiday retail sales. Apple (AAPL-$523) looks like it may soon get a boost. New iPad minis and iPad Air’s just went on sale in its retail stores, which are already jammed with shoppers.

Overseas, China Mobile becomes the first carrier to offer 4G LTE service in China on December 18. Apple secured the final license to operate on China Mobile’s network in September. The forthcoming 4G launch clears the decks for Apple to begin offering its newest iPhones. China Mobile is the world’s largest wireless carrier with 760 million subscribers`, a juicy market for Apple. Trading for only 11 times forward earnings and yielding 2.3%, its stock is undervalued.

Retailers began “Black Friday” early and it feels like it’s now a month long. Their early reports point to a strong shopping season. Tiffany led early reports with a 7% increase in same-store sales with solid results from Asia. More moderately valued stocks in the upper-end category include Movado (MOV-$44) and Nordstrom (JWN-$62).

Fiscal policy blunders in the Congress continue to hamper growth in jobs, enhancing the prospects of discount retailers like TJX (TJX-$63). This continuing buy recommendation does business primarily as T.J. Maxx and does it quite well, having just reported upside surprises for the third quarter. For the current fourth quarter, it is hopeful but forecast only a 1-2% increase in same store sales due to the shortened holiday shopping season (by six days.)

Ross Stores (ROST-$76) is also attractive. It is smaller but growing faster with a greater emphasis on apparel and fashion. Both Home Depot (HD-$80) and Lowe’s (LOW-$48) will gain, as the housing recovery gets warmer. Home prices have increased monthly for almost two years although the pace is slowing. A pickup in housing this spring following a decent retail holiday season would point to another good year for stocks.

Retail stores continue to hold their own in hardware and apparel but the big online retailers continue to gain market share. Amazon (AMZN-$381) easily wins this race with $70 billion in sales, up 27%, but it is very pricey, selling around 100 times estimated earnings for next year. eBay, appropriately, is a comparative bargain. Sales are $15 billion, up 20%, and it is trading at 16 times estimated 2014 earnings.

As indicated by Tiffany’s results, Japan might be coming back. It is the world’s third largest economy, and has been in a deflationary spiral for twenty years. Prime Minister Abe’s name has been adopted for “Abenomics,” a prescription for higher economic growth based on expansionary fiscal and monetary policies. Growth slowed in the recent quarter but still beat expectations and stimulus measures by the Bank of Japan suggest more robust growth may lie ahead. Toyota (TM-$124) remains a buy pending clearer signs of domestic recovery.

In America’s heartland, corn and soybean crops are coming in at record levels. Grain prices are lower but crop levels are above projections, indicating similar upside surprises may be ahead for agriculture suppliers like Deere (DE-$83). It’s trading at a modest 9 times earnings on expectations of flat results despite beating estimates handily in the last quarter. The company expects additional gains in sales for construction and forestry equipment. A company that helps harvest crops is appropriate for Thanksgiving. So are thanks from stock investors, who are also enjoying a very good year.

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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