Highs, Dips And Pullbacks
The stock market is doing the hokey pokey. First they put a record high in and then they take a record high out. No need, however, for investors to “shake it all about” as market conditions for growth-stock pickers remain quite positive. The S&P 500 just logged its fifth loss in six sessions but the overall uptrend remains intact. Pullbacks are both normal and gradual as astute fund managers continue to build positions on down days.
Investors should do the same but dips always stir up their fears of losing, scaring them away from opportunities. Certainly, oil, coal and steel stocks have been whistled to the sidelines but not strong tech, medical and biotech stocks. Warren Buffet commented that he used to buy fair companies at bargain prices. His returns increased when he began concentrating on good companies at fair prices.
Investors should do the same. All too often, “bargains” develop nasty surprises. Quality companies can also disappoint but those with growing asset levels provide reserves for absorbing setbacks and redirecting their businesses. Complacent overpaid managers foul their own nests, ruining once proud names like Sears, General Motors and U. S. Steel.
Some cheat. Lumber Liquidators (LL-$35) may be on the way to well-deserved liquidation after a 25-year old short seller discovered that it was importing lumber with illegal levels of formaldehyde as well as sourcing from protected habitats. Rising markets hatch corruption, lest we forget Tyco, WorldCom or Enron.
Quality tells. As Mr. Buffett has pointed out that someone smoking a cigar butt found on the street is getting a good price but is unlikely to enjoy a good smoke. By sticking (not trading) with good stocks at fair prices in leading sectors, tuning as necessary, investors can do rather well.
This requires discipline and thoughtful calculations of risk. It is not as easy as Will Rogers explained in 1929, “Buy some good stock. Hold it till it goes up…and then sell it. If it doesn’t go up, don’t buy it!”
As we approach new highs in a six-year bull market, we can expect financial commentators to compete for our attention by spouting dire warnings of the March 2000 bubble. Comparative valuations are useful. Microsoft was then valued at 56 times earnings, now at 17, Cisco at 196 tines earnings, now also at 17, Intel then at a P/E of 51 and now at 14. Apple, now the largest stock in the Nasdaq average, has a P/E of 17.
While the stock market will always produce surprises, we do not confront the euphoric valuations that surrounded the bubble in 2000. Oil and other energy stocks may seem like bargains now but I recommend limiting positions to quality stocks like Chevron (CVX-$105), which yields 4%, offering an income-producing option on oil prices. Suncor Energy (SU-$29), Canada’s leading integrated energy company is similar, currently offering a 3% dividend yield.
Despite flurries of favorable price activities, I continue to be concerned with the state of our housing market. The number of “seriously underwater” residential properties was reported at 7 million at year-end, about half of the previous peak. Unfortunately, the definition of “seriously underwater” is defined as a loan to value ratio of 125 percent or more, meaning the homeowner owes at least 25 percent more than the value of the property.
With this overhang and the prospect of weakening markets in Texas and other energy producing areas, I am puzzled that some homebuilder stocks like Lennar are moving up on forecast double-digit earnings growth. Why gamble? Highly probable double-digit growth is coming from Apple (AAPL-$125), Amgen (AMGN-$159), Boeing (BA-$154), Bristol-Myers (BMY-$66), Costco (COST-$150), Disney (DIS-$105), Ecolab (ECL-$116), Nike (NKE-$95), Novo-Nordisk (NVO-$46), Thermo Fisher (TMO-$131), Union Pacific (UNP-$118) and Visa (V-$274). All are good companies trading at fair prices in leading sectors.
General Electric (GE-$25) is missing from this list. As part of its restructuring efforts, the company expanded its investments in energy with what now seems like regrettable timing. Compared to most of our positions, it has disappointed and may be reduced or replaced, perhaps with a less energy-dependent company like Borg-Warner, Honeywell, Johnson Controls or United Technologies. As Alexander Pope advised, “Be not the first by whom the new are tried, Nor yet the last to lay the old aside.”
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
