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Taking Stock

Tony Crowell

Tony Crowell

Living With Corrections

Stocks are closing the quarter down around 2% for March and breakeven for the year so far. After strong performance in 2013 following a good year in 2012, some loss of momentum is normal. The market’s uptrend has been under increasing pressure for weeks and it appears to be entering a correction.

This is a familiar seasonal pattern, particularly in mid-term Presidential election years. Market performance may be lackluster, essentially marking time until outside events spur changes. One relatively certain event will be the arrival of spring, which should help the stagnant consumer sector.

Many companies reported that the brutal winter brought setbacks that will be reflected in their forthcoming earnings reports. Ninety companies of the S&P 500 have already issued downward revisions in this quarter’s results and the market’s direction for the next few months will probably take its cue from forecasts for the June quarter.

It’s usually unwise to sell stocks trying to anticipate a normal market correction. This morphs investors into traders and, even if they avoid a dip, it is very difficult to reestablish positions in time to catch the next wave up. Trading rarely works. Tuning does, with emphasis on proven and prospective companies with strong prospective growth.

Apple (AAPL-$536) stands out. Among other strengths, it has a massive base of 260 million iPhone users. About 9% of these users upgrade quarterly, sales that a new model would expand. Apple will probably launch by fall an iPhone 6 with a bigger screen and other features. Even without a boost from new products, Apple’s earnings per share are estimated in the $42-$43 range this fiscal (September) year. That’s 13 times forward earnings, less than the S&P average of 16.

The company holds $160 billion in cash and investments. Factor that out and its stock is selling for eight times earnings. It yields 2.3% now and some of that cash will probably go for a dividend increase.

These anticipated results contrast with stocks like IBM, whose last two quarterly earnings reports disappointed investors. Coca-Cola is another classic favorite whose sales have flat lined with decreasing popularity among youth. Both companies remain decent long-term holds and are certainly preferable to absurd lottery tickets like King Digital, creator of Candy Crush Saga and a hundred other games that didn’t catch on. (King’s IPO debuted at $22.50 and the stock was promptly crushed to $19.)

There are dynamic big cap stocks whose growth is keeping up with their reputations. Johnson & Johnson (JNJ-$97), with 9% earnings growth for ten years, has boosted earnings through increased emphasis on its higher profit margin pharmaceutical business. Trading for 17 times forecast earnings and yielding 2.8%, it is likely to make it through the $100 level before pausing for breath.

General Electric (GE-$25) persists at a low valuation of 15 times its earnings despite a 10% growth rate. Its forthcoming spin-off of part of its consumer finance sector should encourage more buying.

Intel (INTC-$25) has gone nowhere for a year as investors soured on its tardy adapting to the surge in mobile computing devices. Its research capabilities are unequalled and earnings should return to positive growth in the next quarter. The P/E is 14 and its yield is 3.6%, unusually attractive for a dominant technology company with $53 billion sales.

Consumer demand is still wobbly but the industrial sector continues to move ahead with the overall economic recovery. Borg-Warner (BWA-$59) makes auto powertrains and various engine components. Earnings for this March quarter should be around $.80, up over 20% from $.65 last year. It provided favorable earnings surprises all last year and a repeat performance could spark a challenge of its December high of $63.

Corrections are like the flu, seemingly endless until they disappear. There have been 3 corrections of 10% or more since the market bottom in March 2009. The deepest was two years ago when the Dow lost 2000 points and the S&P 500 20% amid uncertainties when irresponsible pettiness by our Congress led to a downgrade of U.S debt.

The market then bounced back to new highs. Investors should use these correction periods to add high-quality stocks, shedding those not truly loved. After all, there have been 27 corrections of 10% or more since 1945. Given time, every single one turned out to have been a great buying opportunity. Stay cool.

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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