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Taking Stock

Tony Crowell

Tony Crowell

Higher Altitudes

The stock market is flirting with new highs on the S&P 500-stock index. As I wrote two weeks, ago momentum seemed destined to take the market to new highs. The Dow Jones Industrials need about a 300-point rise. That might seem like a lot but it is really less than two percent.

What may seem like market turbulence may be what one behavioral economist called “denominator blindness,” a focus on vivid changes without putting them in context of their bases. On October 19, 1987, an abrupt sell-off took the Dow down 22.6% with a loss of 508 points. A 508-point loss today might seem frightening, but it would be now less than 3%, something that has happened 37 times during the market’s climb from its 2009 low of 6507.

Allowing market gyrations to lose our focus on long-term objectives is a familiar consequence of excessive absorption in financial news. Often, the best tactic is to do nothing, provided there is already a portfolio base in stocks in proven, growing companies If not, dips provide a good opportunity to build this base.

While I expect new highs in the averages, probably by April, the air gets thinner as we climb and a “correction” at some point can be expected. Corporate earnings growth is continuing to new records but the pace is slowing, particularly among energy stocks and many in the consumer sector. I continue to be concerned that the much hoped-for revival in housing remains uncertain.

The market’s rise has elevated valuations making stocks vulnerable to earnings shortfalls. Fortunately, the Federal Reserve has only slightly eased its pressure on the money pedal, continuing the unusually favorable low interest rate environment. Although still quite low, rates are beginning their inevitable climb back up with further damage ahead for bonds.

The strategy continues to be to concentrate on larger companies with strong earnings records and sensible bases for further growth. This demands perspective and a continuing search for favorably priced issues. DuPont (DD-$66), mentioned here several times, still qualifies even as it moves toward its 52-week high. Forecast 2014 earnings are $4.35, up 12%, a restrained P/E ratio of 15. Yield is 2.8% with a probable increase this year. It’s been around since 1805.

Stock valuations, like reputations, tend to persist. Given expected earnings growth, DuPont owners should expect a higher valuation on its earnings. Jazz Pharmaceutical (JAZZ-$166) just reported 2013 earnings of $6.31 a share, up 30%. Wall Street “analysts” from their cramped cubicles reported this as a “miss” (It was 8 cents below their estimates.) causing some nervous selling. This typical short-term focus overlooked the company’s increased forecast of 2014 earnings to a range of $8-$8.25 a share, which would be another 30% gain.

Ireland-based Jazz has developed drugs addressing narcolepsy and oncology. It chose its name to recognize the collaborative efforts needed for successful innovations by both jazz musicians and new product developers.

Chicago Bridge & Iron (CBI-$82), like Jazz, reported a strong quarter with earnings of $1.91, well above analyst estimates of $1.17. The company is no longer based in Chicago but has dual headquarters in Texas and the Netherlands. It also no longer builds bridges or uses iron but has become the largest energy infrastructure company with 50,000 employees. Capabilities include LNG terminals, propane and hydrogen generation plants, nuclear facilities and wind turbines. CB&I forecasts sales in 2014 around $13 billion with earnings per share in a range of $4.80 to $5.65.

CBI’s earnings report is a favorable signpost for engine maker Cummins (CMI-$145). Its new Diesels are environmentally advanced and sales are accelerating. Cummins forecast 2014 earnings per share around $8.50. Its stock is seems undervalued on that figure, which I believe was a conservative estimate.

Finally, Carl Icahn, who already gave Apple (AAPL-$528) a boost, is now prodding eBay (EBAY-$58), both continuing buys.  He’s not afraid of the market’s higher altitude, a judgment I endorse.

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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