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Taking Stock

Tony Crowell

Tony Crowell

The Fed Keeps The Course

The Federal Reserve continues to keep a gentle but steady grip on the tiller. It lowered its growth forecast for the rest of 2014 although it noted that recovery was continuing, allowing it to take another step backwards from its stimulus strategy. As expected, it cut monthly bond purchases by $10 billion to $35 billion. It reaffirmed that it would probably start raising its benchmark interest rate next year.

Overseas, European economies are also maintaining slow but steady improvement, particularly in the recently troubled Southern tier. With the Fed’s announcement reassuring investors that higher interest rates did not lie over the immediate horizon, the stock market’s uptrend has a firm foundation. The S&P 500 and the Dow Jones Industrial Average are making new highs with the Dow less than 100 points away from breaking the 17,000 level.

The Fed has already pushed interest rates down to the floor; as the economy moves up, so will rates. This will be devastating for bond prices. Investors who insist on clinging to the illusory safety of bonds or CD’s should stick with short-term issues to reduce possible loss of principal.

Higher inflation often boosts gold prices but stable low inflation rates pushed gold down 28% last year even while the S&P 500 gained 26%. In 2014, gold staggered up 13% to $1,388 an ounce as turmoil in Ukraine frightened followers but that gain almost vanished as the economy and the stock market continued their advances. Gold is more of a tranquilizer than an investment but true believers can find some comfort in a soundly financed mining stock like Goldcorp (GG-$26). It pays a tidy 2.4% in monthly dividends.

Intensified strains in the Middle East rumbled oil prices and probably distracted investors from the increased outlook provided by Intel (INTC-$29). The company reported stronger-than-expected demand for PC’s by business customers. Its stock got an overdue boost but investors seem to be ignoring this clear signal of growing sales to businesses of capital equipment.

With consumer spending increasing at only a tepid pace and housing still limping, the business sector is taking the lead. Companies serving this sector like FedEx (FDX-$148), which reported surprisingly strong earnings, will prosper. Unsettled fuel prices suggest deferring decision on FedEx but others like Westlake Chemical (WLK-$83) are timely.

Houston-based Westlake makes various polyethylene and advanced polymers products in its Olefins division and PVC and other products in its Vinyl segment. Uses include petrochemicals, plastics and building products. Sales are $4 billion and earnings this year estimated at $5.40 a share, up 18%. Analysts estimate the current quarter at $1.42, up 30%. Such growth, if achieved, will draw investor attention to the company.

Westlake is among the industrial companies with superior growth rates that are encouraging repeated additions to my portfolios. Others include Akami (AKAM-$60), BorgWarner (BWA-$64), Cummins (CMI-$156) and Intel.

The energy sector is regaining momentum, spurred by recovering global growth. Recurring price reactions to seemingly never-ending world crises emphasize the need for a global perspective. Schlumberger (SLB-$107) is the world’s leading supplier of technology, project management and information to the global oil and gas industry. Principal corporate offices are in Paris, Houston and The Hague.

Sales are $47 billion, up $4 billion from 2012, and earnings per share this year will be around $5.70, up 20%. That equates to a price: earnings ratio of 18, about the same as the overall market, but less than the valuation this superior company usually presents. Dividend yield is 1.5% with increases for the last three years.

Much market chatter centers on the bank sector. Bank stocks are still recuperating from their colossal blunders in sub-prime mortgages. Many bank stocks look cheap and they may well be bargains. Paraphrasing Mr. Buffett, I agree that a cigar stub found on the street may be a good value but it is unlikely to be a good smoke. We will always have market dips that expose the weaknesses of “bargain” stocks. Stick with stocks of quality companies in growing sectors.

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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