Finally, The Uptrend Is Back
At last, the market averages pushed through their recent ceilings on increased volume, confirming a resumed uptrend. For several weeks, stocks have advanced on lower volume without conviction, in the manner of someone trying to pad quietly up a flight of stairs. Three months ago, the market sagged down 6% from year-end, but has since climbed back to a 4% gain for the year so far.
Conditions generally favor a continued uptrend. Interest rates and inflation remain low. The overall business recovery in the U.S. got nowhere in the March quarter but is showing scattered signs of regaining momentum. Stock valuations are higher overall than their historical averages but well below levels associated with excessive optimism.
The Federal Reserve continues its accommodating policies while European economies are improving, although they still lag the U.S. At least for the moment, Mr. Putin has suspended his efforts to expand Russia to the old boundaries of the Soviet Union. Even when events in Ukraine were most troubling, there was no panicked selling of stocks, an indication of firm underlying investor support.
These factors suggest that investors can shake some reefs out of their sails, adding to or initiating positions in faster growing companies. Shire (SHPG-$173) an innovative biochemical company based in Ireland qualifies nicely. It provides treatments in Neuroscience, Rare Diseases, Gastrointestinal and Internal Medicine. Sales are $5.5 billion, growing at 15%, with earnings per share for 2014 estimated around $9.75, up from $7.36.
Pfizer’s attempt to buy AstraZeneca and Valeant’s bid for Allergan stirred interest in the healthcare sector. Stockbrokers sometimes try to whet interest in some stock they’re peddling by describing it as “a potential merger candidate.” This always reminds me of Southern girls I have known who would say a boy has nice eyes if they couldn’t think of anything else. I would never recommend a stock based solely on merger prospects but I cannot avoid noticing that Shire is a manageable size in a sector that is drawing interest.
Its current stock price is around eighteen times forward earnings, quite reasonable for 30% growth. It yields a modest 0.6% but any dividend at all is unusual for a biotech and it has increased that dividend for five straight years.
Shire shares some qualities with Jazz Pharmaceuticals (JAZZ-$142), another Irish-based biotech, which I recommended in my June 14 column last year at $69. Jazz is now our twelfth largest position. Like many high P/E stocks, Jazz backed off when stocks weakened earlier this year. It is smaller but faster growing than Shire, whose modest (but growing) dividend enhances its appeal for retirement accounts.
San Diego-based Illumina (ILMN-$159), leads in large-scale analysis of genetic variations and functions. It is the most prominent global provider of gene sequencing and other solutions to a variety of genomic challenges. Sales are $1.5 billion, growing at 23%. Analysts estimate 2014 earnings at $2.16, which would bring its P/E down to around 70, arguably reasonable for the leader in a cutting edge vital life sciences field.
Market jitters earlier this year knocked down high P/E stocks. Illumina and Jazz have records of solid profits, bounced back smartly and now trade 15-20% below their 52-week highs. Fad stocks like Twitter and Pandora in cluttered social media sectors lost half their value in a few weeks, have not recovered and should be avoided.
Apple (AAPL-$635), once considered a fad stock, became the global number one in value on a remarkable record of sustained financial achievements. It splits seven to one effective June 9, which will probably leave it trading around $90 for a while. Stocks often settle down after splits as investors realize that only the perception of the stock has changed, not its performance.
Stock splits are really curtain calls and Apple continues to deserve repeated applause. Estimates for June quarter earnings vary broadly, averaging around $8.50, up 14%, pointing the way to full year earnings around $44. That’s a P/E of 14, low for such proven success and accompanied by a 2% yield that Apple will probably boost annually.
Successful stock investing is grounded on discipline and quality. Changing market conditions provide no need to change that strategy.
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