Dealing With The Dips
Almost halfway through the first quarter and the stock market is making a good effort to regain its footing. The market will come back resume its uptrend at some point; the question is how much further it may sag. Currently, the S&P 500 is off around 5 percent since it made a record high on January 15, a bit more since January 1. This slide into “correction” mode has gotten everyone’s attention but it hardly qualifies as a sell signal.
Prior to this dip, the stock market has lost 5 percent or more eighteen times since the bull market got going again in 2009. The most recent was last May when it fell 5.8% when the Federal Reserve dropped its first hints of phasing out monetary stimulus. The sharpest “correction” took place between April and October two years ago, when it sank 19 percent. In each instance, stocks rebounded, making new highs as the market’s major uptrend continued.
Somewhat like talking about the weather, forecasting the direction of the stock market is always a popular topic. Despite this interest, I believe that this is almost impossible. No matter how much research is brought to bear, logic often fails when confronted with the emotional forces of greed or fear that sweep through the trading floors.
I prefer action to speculation and believe in tuning portfolios much like adjusting sails while keeping a boat on course. This ship handling keeps our portfolios on course, recently through selling some less stable positions as stocks began to wobble in January,
Recent selling was orderly and never swelled to the huge volumes that come with massive liquidations by big institutions. Stocks appear to be steadying and it seems time to begin adding to positions, particularly among growing larger companies.
Amgen (AMGN-$116), DuPont (DD-$63) and Ecolab (ECL-$99) are reporting excellent results and I am adding to our positions. Cognizant Technologies (CTSH-$94) reported solid results, announced a 2:1 split and is also a buy. Vascular Technologies (VASC-$23), a medical device maker that is among my smaller company picks, reported record earnings and remains a buy.
Blackstone (BX-$31), a substantial investment manager, is particularly interesting. Among its activities, a big $21 billion private equity fund that it raised eight years ago is getting closer to the threshold that Blackstone must clear in order to begin sharing profits. Holdings include Hilton Hotels and SeaWorld, both of which Blackstone recently took public.
The threshold is closer and should be achieved later this year or in early 2014. Meanwhile, Blackstone doubled its profit last quarter, yet continues to trade at only ten times earnings. It recently raised its dividend to a level that, if sustained, would provide a 7% yield.
As the successful Hilton public offer shows, the hospitality sector is recovering nicely from the economic downturn. Wyndham Worldwide (WYN-$72), a new buy recommendation, operates in three sectors: hotels, vacation rentals and vacation sales. All three are doing well and the company is growing both sales and earnings at 12-15% rates. Earnings for 2013 will be around $3.80 and forecasts for 2014 look to $4.30, up 13%. Its stock yields 1.7% with increases for the last three years.
Consumer and retail stocks are reporting mixed results. This concerns me that the housing recovery may not be as robust as anticipated. Should solid signals of a vigorous housing recovery appear, Lennar (LEN-$41) and Standard Pacific (SPF-$8) would shine.
The technology sector remains strong. Akami Technologies (AKAM-$57), another new buy, just reported earnings that blew through Wall Street estimates. Akami, sometimes labeled “the WD-40 of the Internet,” provides services that accelerate and improve content delivery over the Internet. Sales this year will be around $1.8 billon, up 13%, probably exceeding $2 billion in 2015. No dividend but earnings are keeping pace with sales growth.
Rather than guess at market swings, using dips to buy quality stocks like those mentioned here is rewarding. The damage in focusing on market predictions comes if it encourages investors to morph into would-be traders. Keeping a longer term perspective and continually tuning for quality works quite well.
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/