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Taking Stock

Worse Than a Crime

The stock market continues to make steady progress. Investing in stocks resembles flying airplanes; things usually work out well although one should never become complacent. The business climate keeps improving, helped by the actions of the Federal Reserve and the accompanying low interest rate environment. Stock prices are not running ahead of earnings growth so valuations remain reasonable.

As Warren Buffett wrote recently to Berkshire Hathaway shareholders, “No mater how serene today, tomorrow is always uncertain.” He continued, “Don’t let that reality spook you. Politicians and pundits have constantly moaned about terrifying problems facing America. The prophets of doom have overlooked the all-important factor that is certain. Human potential is far from exhausted, and the American system for unleashing this potential remains alive and effective.”

Mr. Buffett sounds right on target to me, as he usually does, and as he also did last week in accepting the “resignation” of Mr. Sokol, once one of Berkshire Hathaway’s leading managers. That incident drew widespread media coverage, partly because of Mr. Buffett’s prominence but also because the hint of “insider trading” added a touch of scandal as if it were news of a paternity lawsuit that somehow involved an archbishop.

Traditional violations of laws against insider trading typically involve buying or selling stock ahead of public release of information regarding significant decisions by a company. In this case, Mr. Sokol bought stock prior to Berkshire, his employer, deciding to buyout the smaller company in which he had recently taken a substantial stake.

This sounds less like insider trading and more like another doctrine of “corporate opportunity” that attempts to restrain corporate insiders from taking for themselves a business opportunity that could benefit their corporation. That is based on the fiduciary duty of loyalty, which seems to have been overlooked in much of the enormous media coverage.

Mr. Sokol’s acts were probably not criminal but are neatly labeled in a quote attributed to Talleyrand, the extremely clever diplomat. One of the several French governments with which he held significant posts aroused an outcry by ordering an assassination. Its impact was neatly summarized, “This is worse than a crime; it is a blunder.”

Mr. Buffett is still Chairman of Berkshire Hathaway. Mr. Sokol is unemployed although he would probably be welcome at some firm like Goldman Sachs. Mr. Buffett’s priorities for reputation and integrity reflect his focus on long-range values that lead to superior investment returns.

I will keep up my efforts to find companies for my clients that meet Mr. Buffett’s criteria of demonstrated earning power, good returns on equity and little debt. Franklin Electric (FELE-$47) is my newest candidate. It develops groundwater and fuel pumping systems, including submersible pumps and monitoring controls. Sales are $715 million, growing at 12% with earnings growing at the same pace. The yield is only 1% but Franklin is loyal to its shareholders with annual dividend increases for the last 17 years.

Federal Reserve policies are boosting export sales of American manufacturers. A firmer stock market is good for smaller firms like Franklin, Global Metals (GSM-$23), Rockwell Automation (ROK-$93), and Roper Industries (ROP-$86). Big caps are also doing well, led by DuPont (DD-$55), GE (GE-$20) and 3M (MMM-$93).

Google (GOOG-$580) dropped a bit on a change of its CEO. This is silly as such moves usually result in stock price increases stemming from new policies. With investor confidence returning, both Google and Apple (AAPL-$338) are remarkably opportune buys. To pass them up is probably a blunder.

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. (949)-494-1376/(800)-697-2622; www.crowellroberts.com

 

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