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Taking Stock

Tony Crowell

Tony Crowell

The Federal Reserve Is Coming To Town

The economy is expanding at a “modest to moderate” pace, according to a recent announcement by the Federal Reserve. After mixed results earlier this year, there are signs of acceleration in some key sectors. Sales of new homes picked up this fall and a report by payroll-processing firm ADP found U.S. businesses adding more jobs in November than in any month this year.

The Fed report cited strength in the manufacturing sector and consumer spending. Early holiday shopping reports were mixed with better results coming from higher-end stores and from online shopping. The Business Roundtable, a group of top corporate CEO’s, reflected its most optimistic outlook in years. It noted that the biggest threat to continuing recovery is Washington’s failure to sort themselves out and present a more predictable environment.

Overall conditions are increasingly stronger although uncertainties persist. The dominant short-term uncertainty for the stock market comes from the Fed’s forthcoming December 17-18 policy meeting. It is possible that the Fed may then announce its intentions on tapering its $85 billion monthly bond-buying program. This has been quite effective in lowering borrowing costs, encouraging spending, hiring and continuing growth.

The Fed announced in October that it expected to commence this taper “in coming months.” Even though the jobless rate is improving slightly, I believe enough uncertainties remain to make it quite unlikely that the Fed will behave like Uncle Scrooge when so many issues still hang in the balance. With this pressure eased, the market’s usual yearend behavior will probably continue it into new highs by mid-January.

Apple (AAPL-$569) is already through its 52-week high, up 40 points since my comment three weeks ago that its sleigh full of new products would brighten its perception on Wall Street. Carl Icahn and other activist stockholders are calling for Apple to increase its already substantial stock buyback program while it appears that Apple has finally signed up China Mobile, a very large market for its newer iPhones. Despite this flurry of activity, its stock is still reasonably priced and even provides a 2.3% dividend yield.

The strongest sales pickup from the holiday shopping season kickoff came from online sales. eBay (EBAY-$51) is doing quite well and is trading at 24 times current earnings, reasonable for an established online retailer with over $15 billion sales. Sales are growing at 20% rates and estimated earnings at 12%- 15%. Fixed-price sales are now 71% of its business. Its valuation is a fraction of Amazon’s and its PayPal subsidiary is a bonus.

Buenos Aires-based Mercadolibre (MELI-$105) is often described as the eBay of Latin America. eBay must agree as it owns 18% of this company. Internet penetration in Latin America is still in its early stages but its growth is already faster than eBay. It’s currently trading at 31 times forecasts earnings. Unlike eBay, there’s even a dividend although a modest 0.5%.

Recent recommendation John Deere (DE-$84) jumped on news of an expanded stock buyback. The company recently completed new factories in Brazil, Russia, India and China, reflecting a farsighted strategy in emerging economies. It provided positive surprises with recent earnings reports and its current valuation of only nine times earnings seems understated. It currently yields 2.3% with dividend increases for the last nine years.

Cummins (CMI-$129) yields 1.7% with increases for seven years. It is hitting on all cylinders with new turbo diesel engine deals with Nissan and with Navistar. It is bringing on stream new heavy-duty engines that run on natural gas. Its price pulled back after its third-quarter report lagged estimates due to short-term factors. Earnings growth next year should exceed 20% and expansion into residential and light construction markets will aid expansion in sales and stock price.

A good year for stocks appears headed for a good finish.

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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