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Taking Stock

Tony Crowell

Tony Crowell

After The Streak Ends

Stocks stumbled into the New Year, caught their breath and moved back up with the S&P 500 inching above its previous closing high set on December 31. The Dow Jones Industrial Average is still 150 points below it record close at yearend but current momentum should bring it also into the fold.

Momentum is often a dominant force in stock market movements. While the media seek attention by emphasizing ephemeral events, investor enthusiasms for either fear or greed track the moods of the market. The impact of momentum appears clearly in market action for the last two years.

On December 31, 2011, the Standard & Poor’s 500-stock index ended the year at 1257. It closed higher on the first trading day of 2012, finishing the year at 1426 never dipping below its level on opening day. That made for a 13% gain in 2012, quite satisfactory but never making headlines as a great year in stocks.

As 2013 began, investor attention focused on Congressional inaction and possible Federal Reserve actions. The financial crises of 2008 left lasting scars but these began to heal as investors realized that stocks were undervalued in a growing economy. The S&P 500 closed at 1848 on December 31, 2013, up 29%, again without ever dipping below its opening level.

That two-year streak is rather remarkable but its steady performance drew little attention. This recalls the slowly developing consecutive baseball game records of Lou Gehrig and Carl Ripken. The market’s last two-year streak of avoiding any negative territory came almost forty years ago in 1975 and 1976.

The streak ended two weeks ago when stocks faltered in the opening week. Their uptrend remains intact but it is probable that it will be subject to pressure as we move through the year. With momentum still positive, this is not nor will it be a time for panicked selling, which never works. It is an appropriate time to upgrade toward larger, strongly financed companies, perhaps moderating growth targets.

Healthcare will always be in demand and I am adding Roche Holdings (RHHBY-$69). This Swiss-based pharmaceutical and diagnostics business has over $50 billion in sales and is reasonably valued on an estimated $4.00-$4.10 earnings for 2013, up 10%. Its stock offers a 2.80% yield from dividends raised for the last 3 years.

Roche joints Nestlé (NSRGY-$74) among our Swiss Guards. This global food giant has over $100 billon in annual sales. Earnings this year will be close to $4.00 a share, also up around 10%. It yields 2.9% from dividends increased for the last 15 years.

I sold Illumina, Anika, Computer Programs, Stratasys, Calumet and CVRR to free up cash for upgrading. I added to existing positions in DuPont (DD-$63), Diageo (DEO-$129), eBay (EBAY-$53) and Northrop Grumman (NOC-$118). I also bought more Generac (GNRC-$51). This is not a large company ($1.5 billion sales) but its primary business of providing electric generators for residential and commercial purposes is growing with an unsettling climate.

The climate for stocks, which is never totally calm, is becoming more unsettled, thus my emphasis on more stable companies. After the previous two-year streak ended, the S&P lost 11%, but then had only three mild loss years in the next twenty years.

Valuations are useful. A year ago, stocks entered 2013 with prices averaging 14.6 times their historical (actual) earnings. The P/E long-term average is 15.3 and stocks are now around 18 times earnings, having gone from slightly undervalued to moderately overvalued. Earnings coming in now will bring this ratio down but investors should favor quality stocks with reasonable valuations like Apple (AAPL-$550). It’s trading for 14 times earnings with a dividend yield of 2.3% and with strong probabilities of favorable surprises later in 2014.

As always, there will be unexpected events but identifying trends and anticipating changes will encourage the surprises to be favorable.

 

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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