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Taking Stock

Tony Crowell

Tony Crowell

The Fed Points The Way

The Federal Reserve under new Chair Janet Yellen continues to shape the financial markets. Its policies persist in those set by her predecessor, Ben Bernanke, who led the recovery from the financial disasters of 2007-2008. New programs of unprecedented depth provided liquidity and low interest rates, a powerful combination still supercharging the global economy.

The previous chairman, Alan Greenspan, guided with such opacity that Wall Street developed a cottage industry in parsing what he meant. The Fed now speaks with remarkable clarity. This week, Ms. Yellen warned of excessive valuations in leveraged loans and “junk” bonds. She commented that broad increases in prices of stocks and other assets had risen but that they remain “generally in line with historic norms.”

An accompanying report also referred to “substantially stretched” valuations of smaller social media and biotechnology stocks. It is unusual for the Federal Reserve to offer such specific investment advice. It would be dimwitted to ignore it, particularly as it jibes with the advice I’ve offered in this column.

My recommendations include large biotech stocks like Amgen (AMGN-$116) and Celgene (CELG-$84) that have substantial financial strength unlike small profitless fledglings that float about like plant spores. Recent recommendation Shire plc (SHPG-$253) remains attractive as its price advances with repeated takeover bids by Abbvie (ABBV-$54). At last report, it seems probable that the two companies have agreed on merger terms slightly above Shire’s present price.

Earnings for the second quarter are coming in, already lifting some of our portfolio members. Intel (INTC-$33) took center stage. Its stock price has languished as the company lagged in adapting to shifts from desktop to mobile devices. Blowing past Wall Street estimates for both sales and earnings, it showed that it is back. The company is the world’s largest semiconductor maker with the world’s largest research budget and is destined to keep its primacy.

Intel’s report sent its stock price up 8% overnight, boosting its value within my portfolios to the number eight position. With already $55 billion in sales, growth rates will ease but its earnings valuation is still moderate. Its yield is unusual in this sector at 3.0% with dividend increases for the past ten years.

Apple (AAPL-$93), my largest position, announced a new partnership with IBM. This linkage, which received little reaction in their stock prices, will be quite significant to both. Apple will provide a set of mobile solutions that will link its operating systems to the business marketplace. Among many other possibilities, this will integrate IBM’s big data solutions with the Apple’s iPhone and iPad.

Apple stock has been flirting with the $100 price level since its recent 7:1 split. Its next earnings announcement should show it on its way to at least $6.30 a share for its September fiscal year. I expect its price to be back to three digits by year-end and probably sooner.

Earnings increases buoyed other portfolio stocks, among them investment managers Blackstone (BX-$34) and BlackRock (BLK-$320). These continue to outperform traditional banks, which are still burdened with billions of dollars in dubious real estate loans.

My newest buy is Verizon Communications (VZ-$50). This is another large company whose managers are achieving excellent growth in a vital sector. Its come a long way since the Bell Atlantic days, particularly with Verizon Wireless. Earnings were flat early in the wireless era but picked up in 2012 when they were rose 8%. They were up 22% in 2013 and analysts expect 25% growth this year.

It announces second quarter earnings next week and its CEO has already promised reporting more than 1.4 million new mobile subscribers. 2014 earnings will be at least $3.50, a remarkably low valuation for a company of this caliber. Yield is 4.2% with increases for nine straight years.

The Federal Reserve may give additional guidance at its last open-market meeting this summer at the end of the month. With employment levels still needing boosting, it is likely to continue to keep interest rates low. That will keep stocks on track for additional overall market highs by year-end.

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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