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Taking Stock

Tony Crowell

Tony Crowell

Seeking Stability

After making new highs in mid-January, the stock market lost momentum and dipped six percent. Trading volume increased only moderately, a sign that institutions were not dumping stock. Stocks stumbled for three weeks, and then regained their mojo on increased volume boosting the S&P average to one percent below its year-end close.

In all probability, momentum will continue and the mid-January record highs overcome. Corporate earnings reports continue to be moderately favorable overall although investors are becoming more critical of shortfalls in forecasts. Companies tend to temper these with caution. With GDP growth picking up toward 3% in 2014, there will be some positive earnings surprises in coming months.

This favorable environment is keeping stock valuations toward the high side, although hardly at dangerously euphoric levels. Low interest rates support stock valuations, a major underpinning of last year’s market performance. Stocks wilted late last spring at the first hint of the Federal Reserve taking its foot off the monetary pedal, then went on to a robust run as the Fed signaled that action would be gradual.

Recent market action was a condensed repeat. Stocks faded as Wall Street worried about new Chairman Yellen and then rallied when her recent testimony brought no surprises. Presently, the environment continues favorably for stocks although investor skittishness makes steadier stocks attractive.

Proctor & Gamble (PG-$77), with 22 brands each generating at least $1 billion and a reputation for excellent management skills, is a very steady company. Sales are $84 billion, growing modestly, while earnings for its fiscal year ending this June will be around $4.25 per share, up 5%. Its stock is ideal for IRA’s and other retirement accounts with a current 3.1% yield and dividend increases for a remarkable streak of 60 straight years.

Johnson & Johnson (JNJ-$92) is similar with a 2.8% yield increased yearly for “only” 51 years. Forecast 2014 earnings are $5.83, up 5%. Besides its familiar consumer products, J&J has faster growing pharmaceutical and medical supply segments. J&J is a continuing recommendation and I am adding Proctor & Gamble, whose stock price slipped recently on exaggerated worries about its sales in emerging markets.

Similar fretting took a half dozen points off Franklin Resources (BEN-$53), a large asset manager best known for the Franklin income funds and the Templeton global funds. The late Sir John Templeton picked Franklin to continue his primacy in global investing, then something of a novelty and now essential. Forecast 2014 earnings are $3.79, up 12%. Its stock complements our positions in large asset managers BlackRock (BLK-$303) and Blackstone (BX-$34), which remain buy recommendations.

The financial sector continues to be a leader. The large banks may still be suffering hangovers from the massive mortgage crises that accelerated the financial crisis and I prefer investment managers to the banks at this time. Farming is perennially even more unstable, as illustrated by the latest quarterly report from Deere (DE-$86).

It blew through analyst estimates for both sales and earnings but cautioned that farm equipment sales will likely be lower this year. Here, the corn crop forecasts and farmland prices are already trending down but global demand continues to drive sales for suppliers like Deere and seed and chemical products from DuPont (DD-$63). Their stock prices bounced back quickly from the recent dip. They remain buys, particularly if price weakness develops.

Generac (GNRC-$56), among our smaller portfolio members tore through estimates and popped a half dozen points. The company makes portable and industrial generators, whose sales are accelerating in response to climate changes.  Generac also remains a buy.

Finally, RF Micro Devices (RFMD-$5.65) is hardly steady but is still promising buy for the more aggressive. The company’s products are used in Apple’s newest iPhone as well as in Samsung smartphones. Sales are $1.2 billion, growing at 10%, while earnings have been erratic. 2013 was a loss but 2014 should rally to at least $.30 a share. No dividend, of course, but a good probability of the company regaining earnings momentum. The market is showing some nervous spells but its momentum is returning.

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 1995. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

 

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